Life office Axa will incorporate behavioural finance concepts into its strategic imperatives in order to better educate and understand customers.
University of California, Los Angeles Professor Shlomo Benartzi said many people did not understand basic theories of compounding, fees and diversification.
“People don’t understand compounding. They don’t understand that by investing for the long run their assets will grow exponentially … but they also don’t understand that investment management fees they pay, those could compound very quickly too,” Benartzi said.
“Compounding works whether it’s the return you make or whether it’s the fees you pay.”
Most people could not calculate what affect paying an extra 1 per cent per year in management fees would have on their savings after 30 years, Benartzi claimed. Most people say 5 per cent.
“The quick and dirty answer is 30 per cent. And people get shocked. How come a third of my account will evaporate? It’s very simple,” he said.
People do not understand the notion of diversification, the expert said. Most people will share out their investments equally.
“They split half and half even if one is the Bhutanese Gas Company and the other a global index with 5000 stocks,” he said.
Axa Asia Pacific strategy head Arun Abey said it was important to formulate a financial plan for the client and not for their money.
The company will work on making clients’ investments and savings tangible as many people find it difficult to visualise the worth of large sums of money.
