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FPC007B Client Engagement Skills Management Assignment Solution
FPC007B Assignment 1 Brief
- Topic: Client engagement skills – finance
- Document Type: Assignment Help (any type)
- Subject: Finance
- Number of Words: 2000
- Citation/Referencing Style: Harvard
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FPC007B Assignment 1
FPC007B Assignment 1: Diagnosing a key problem (40 marks)
|Learning outcomes (LO) mapping||Marks|
|1. Critically evaluate the explanations of market and investor behaviour according to portfolio and prospect theories.||15|
|2. Extend the insights of behavioural finance to understand the nature of client relationships in the context of financial planning.||20|
|3. Compare and contrast the effects of emotionally intelligent behaviours and critical thinking behaviours on the outcomes of client engagements in a financial services company or licensee.||0|
|4. Critically examine the authenticity of communications from a financial adviser to a client with feedback from an assessment of communication styles.||0|
|5. Evaluate a range of heuristics, biases and decision errors made by financial adviser and clients in a context of financial services.||0|
|6. Build a professional development plan based on results and feedback from various sources.||0|
|Assignment presentation, structure and referencing||5|
Assignment presentation and referencing (5 marks)
You are required to research beyond the subject notes in answering the questions in this assignment. Reference and cite all your sources when quoting or using material from external sources.
Include a reference list at the end of your assignment. You are required to:
- Use appropriate presentation and format for your assignment
- Demonstrate independent research and analysis
- Demonstrate appropriate use of relevant references
- Follow the Harvard referencing style as recommended in the ‘Referencing and Citations Guide’ available from the ‘Learning Hub’ in KapLearn
- Include a reference list at the end of your assignment following the recommended referencing style
- Adhere with the assignment word limit.
Question 1 Diagnosing a key problem (35 marks | Word limit: 2,000 words)
Read the information provided in Topic 1, as well as the required readings and additional resources.
This assignment is designed to help you identify a key business problem that can be elaborated using concepts in behavioural finance. It is set out in two (2) parts.
Part 1 — The interview
Using the feedback provided to you from your tutor in the forum, finalise your chosen problem from Task 1. Undertake two (2) interviews using the list of open-ended interview questions provided in ‘Appendix A’ to help you research the problem events (e.g. causes) and problem consequences (e.g. effects).
Interview at least one (1) financial adviser and one (1) client service person (in a client-facing role) in a financial planning environment for responses to the open-ended questions. If you are an adviser,vyou may choose to answer your own questions for one of the required interviews, however, you must still conduct a second interview on another colleague who is also an adviser or someone in a client-facing role.
Regardless of whether you are an experienced adviser or do not have any experience, it is important that you have two (2) sets of interview questions completed and include those completed questionnaires as appendices in your assignment.
‘Appendix A’ outlines the open-ended interview questions required for your two (2) interviews. Include the interview responses to the questions as appendices to your own completed assignment. The responses are not included in the 2,000 word limit.
‘Appendix A’ also includes a reflection template. This is simply a tool to help you analyse and prepare for part 2 of this assignment. You are not required to include this in your submission as the analysis you record in the reflection will be included in part 2 of your assignment.
It is essential that you relate the issues identified to how your business/employer could facilitate a better outcome for you and the client.
You should send the questions to the interviewee prior to the interview so they can prepare.
Note: If you do not have access to a financial adviser, please let your tutor know.
Part 2 — Critical analysis
Write a critical analysis with specific analyses of the interview responses. As a guide, the analyses should discuss the following points:
- Interviewees’ opinions regarding the similarities and differences in the problem event and consequences that you identified
- The strengths and weaknesses of interview comments, basing your assessment directly on the concepts of behavioural finance
- Your reasoning that supports recommendations on how to better manage the problem. Specify why you would accept, partially accept or reject your interviewees’ comments when you formulate your recommendations.
Ensure that you relate these experiences to the theories/concepts and ideas outlined in your literature research and reference them accordingly. You must explain your opinions with concepts learned in Topic 1.
Include interview questions and answers in your appendices and cross reference them within your answer. Refer to the marking guidance as a guide to how you should structure your analysis.
Marking Guidance for Question 1: Diagnosing a key problem
At a minimum for a pass grade, your assignment must adequately satisfy the learning outcomes defined for this assignment.
|Pervasive problem when engaging with clients identified||Discussion of the context, including but not limited to:• portfolio theory and prospect theory• loss aversion
• decision heuristics: representativeness, availability, anchoring and adjustment
• disposition and cognitive biases
|Open-ended questions for research of problem event and consequences
|As a guide, the analyses should discuss the following points:• questions should explore the practical application of behavioural finance that can be observed in the workplace• there should be a description of situations and conversations that explain the company’s
pervasive problem (e.g. causes)
• there should be a description of outcomes, results, feelings, interpersonal reactions and opinions (e.g. effects)
Completion of the interviews with comprehensive write-up
|Analyses of the interview responses||Adequately explore key concepts in behavioural finance, including:• the survey/questionnaire or secondary data is reliable to answer the research questions• the survey/questionnaire or secondary data is based on a thorough review of the literature||10|
|Writing style||Presentation of written document to the standard expected of a student undertaking amaster’s degree, including:• consistent use of the Harvard referencing style
• sound report structure, sentence structure, grammar and spelling
• an appropriate and correctly formatted reference list
Insert your answers to Question 1: Diagnosing a key problem below this line
Interview – 1
The key problem in Interview 1 is the client misunderstanding their ability to handle investment risk.
The example used involves a young guy (23) who was sitting on a lot of cash in a savings account and has sought financial advice to achieve a better investment return than he is currently getting.
A discussion was had with the client explaining risk tolerance, diversification and time horizon for the invested funds. This helps me select the right investments for the client’s risk profile using the portfolio theory. A theory which gives the client the best chance of maximising returns by taking on the optimal amount of risk for their tolerance. A risk/reward payoff.
After numerous discussions with the client, i discovered he was willing to take on above average risk with investments with the aim of receiving a higher return over a period of 5-7 years. Potential losses werevdiscussed, but given the client’s long-term view, they were dismissed by him. I presented him with a model portfolio showing the selected stocks and dividend return for his research. The next day he agreed to go ahead with the proposal. It seems the client was using heuristics as a type of cognitive laziness for his decision making as the client admitted that he didn’t research any parts of the proposal.
The portfolio was established, and the client began his investment journey. Initially I found the client full of optimism as most stocks within his portfolio performed strongly over first 4 months. It appears the client had a confirmation bias and from this we can see he has fallen into the prospect theory trap. His bias was towards focusing on the gains rather than the potential losses.
He was more and more willing to add new funds to his portfolio. This overconfidence resulted in a false sense that nothing was likely to go wrong.
The client’s mood quickly changed with the onset of Covid-19. The ASX subsequently lost approx. 40% from its high and every stock in the portfolio took a severe drop in value. The client became stressed and began calling the office daily, concerned he would lose everything that he had invested due to the onset of a pandemic.
My advice was to hold everything in his portfolio as they were quality stocks that we expected would rebound strongly. The client agreed with this strategy for a few days but as the media began to constantly sensationalize the drop in the ASX, he began to get concerned about losing everything again and finally decided against my advice and sell his portfolio.
Likely Causes & Effects of the Problem
From the case study above, I had a client that appeared to be too overconfident about investing in the stock market, given his age (23) and not having invested through any financial crisis e.g. GFC. This showed as he didn’t have any concerns about potential losses. A classic case of the prospect theory. The consequences of which came to haunt him as the market dropped and his overconfidence bias turned into a loss aversion bias.
It turned out that he was more concerned about losing any more value in his portfolio than riding the storm out. The ability to watch the moves in his portfolio every 20 mins showed he was affected by an availability bias and showed the decision to sell was purely an emotional one which could be said, was caused by an affect heuristic (Ackert and Deaves, 2009). Meaning the depressed mood of the client found him not wanting to take on any more downside risk.
Analyses of the interview responses
The client was initially happy to accept my advice which was based around the portfolio theory for thevclient’s risk profile and objectives. I believed the client was sufficiently briefed about potential losses and gains while investing in the stock market. The client’s personality showed he was full of confidence and I believe that contributed to his decision making. Ackert and Deaves (2009) explain about the affect heuristic whereby individuals who display positive feelings towards something are willing to take more risk. The flipside to this however was when the client’s portfolio was dropping, his depressive state caused him to react emotionally.
It is clear from the case study that not enough time was spent discussing investor behaviour and potential biases to my client. Completing a risk profile and discussing potential losses is only one part of the equation. More time and education needs to be taken for a client to fully understand their own particular biases and have a strategy should an event like Covid-19 happen again. I have shared my experience with the other advisers in the office during our weekly compliance meeting, making them aware that certain biases are also prevalent in advisers as well as clients.
Interview – 2
From the interview with David Cope (branch manager of financial planning firm) we can see that clients of his firm took a massive risk by investing into a speculative stock with borrowed funds.
The clients had a property portfolio which made them feel quite wealthy because the property prices were high as a large oil and gas plant was being built in the town. The husband, who was a construction worker, received a hot tip from someone close to the company and after a brief research of the company decided to invest $1 million dollars into the speculative stock.
It was discovered 2 weeks after the purchase that 2 of the directors of the stock were involved in fraudulent activities and the stock plummeted to 10c. Needless to say, the clients became very stressed, depressed and began calling the office daily trying to get some answers. The adviser who bought the shares decided to move to another firm shortly after. That was 5 years ago, and the clients still hold the stock currently trading at 30c.
It appears that during the initial interview the adviser failed to do a proper fact find and it was later discovered the funds used to purchase the stock were from a redraw facility on the client’s investment loan.
During the subsequent years, the big project in town came to an end and property prices retreated as did the rental income. The clients found their perceived wealth had declined considerably. Adding to their problems, the client’s wife had a medical issue and could no longer work. This left the couple with only one income to continue paying the investment loan off.
David is now looking after the clients and they catch up for a meeting once a quarter.
Likely Causes & Effects of the Problem
If we look at the client’s issue based on the portfolio theory, we can see that in an efficient market, the hot tip would pay off and the clients would make good money in a short amount of time. The clients would have read all available research on the company, would have allocated the correct amount of money for the associated risk and the company would have delivered on it’s promises through good management.
On the other hand, if we look at the process based on the prospect theory, we see a different scenario. We can see that the client was more focussed of what gains could be made from the share purchase rather than any potential losses. The hot tip was expected to double his investment within 6mths. His information came from someone close to the company. He didn’t think about the possibility of it dropping to 10c. The prospect theory states that if investors are faced with perceived gains or perceived losses on an investment, generally investors will focus on the perceived gains. This is why an adviser’s role is important. I’m sure if the adviser took the time and explained the risk of such an investment and how much the client could potentially lose, he may have adjusted the amount he placed into the stock.
Tversky and Kahneman (1981) developed the prospect theory to explain why investors make irrational decisions based around biases. If we look into the case study we can see a number of prevalent biases in the client’s decision making.
Overconfidence bias – With inflated property prices, the clients seemed to feel quite wealthy as their property prices high. This gave them a false sense that investment values, whether it be property or shares only go up.
Affect heuristic – With the positive feelings associated with high property prices, we can also see that the clients were willing to take a big risk on the share market with no prior research. A shortcut to easy money.
House money affect – The clients had used borrowing for their properties which resulted in good gains. It appears that they rolled the dice and tried again, this time in the share market with a much different result. Very much the move of a gambler.
Analyses of the interview responses
From the interview with David, I was informed that the initial meeting by the adviser with the client was focussed more about the trade rather than taking the time and explain the risks of investing such a large sum of money into a speculative stock. The clients have stated that had they have been made aware of the risks they would not have put such a large sum into one stock.
The clients are continuing to use the firm and David is the adviser on the account. David has explained that the clients were very stressed in the beginning and still continue to be concerned that they may lose their invested funds. Buyer’s remorse is very prevalent. However, they refuse to sell and are living with hope that they may get their funds back. It appears they have a price anchoring point of $1, which was the initial buy price of the stock.
This is a sign of confirmation bias. They believe that because the shares were $1 when they bought them, that must be what they’re worth. David has discussed with them that the only value they should think about is the current market price, but they cannot bear to sell the stock at a loss. The clients are now so fearful of realising a loss that they are only focusing on getting square not making a profit. Hanging on to a losing trade is a sign the clients are affected by the disposition effect which is part of a loss aversion bias.
After holding the underperforming stock for 5 years and potentially holding for another 5 years waiting to recoup the loss, this could be seen as a significant opportunity cost.
David has stated that the clients have become very risk averse in their superfund, which he also manages. He found it quite hard to regain their trust and although he has a good relationship with them now, it took a long time to repair the damage. We can see from the case study that the previous adviser was more concerned with placing the trade than he was with fully informing the clients of the risks involved with the investment.
As an adviser, I would first complete a through fact find, work through a risk profile questionnaire and take the time to make the clients aware of any biases they may be showing and how that could affect their decision making. It is also important for an adviser to be aware of any underlying biases they might have like overconfidence when talking to clients.
Being aware of the certain biases that influence a client’s decision making can go a long way to helping them reach their goals. David has also learnt from the experience and has passed on his knowledge to the other advisers in his office through weekly compliance meetings.
Ackert, LF and Deaves, R (2009), Behavioral Finance: Psychology, Decision-Making and Markets. Cengage Learning, Mason, United States.
Cherry, K (2020) Heuristics and Cognitive Biases. Viewed 15 December 2020 https://www.verywellmind.com/what-is-a-heuristic- 2795235#
Douglass, H (2019) 10 cognitive biases that can lead to investment mistakes. Viewed 15 December 2020 https://www.magellangroup.com.au/insights/10-cognitive-biases-that-can-lead-to-investment-mistakes/
Lin, M (n.d.) Why Investors Are Irrational, According to Behavioral Finance. Viewed 15 December 2020 https://www.toptal.com/finance/financial-analysts/investor-psychology-behavioral-biases
Morningstar – Investing Basics – Modern Portfolio Theory explained. Viewed 10 December 2020 https://www.morningstar.com.au/learn/article/investing-basics-modern-portfolio-theory-expl/204228
Murad, M (2020), Prospect Theory: How Users Make Decisions Viewed 15 December 2020 https://www.invespcro.com/blog/prospect-theory/
Tversky, A & Kahneman, D (1981), ‘The framing of decisions and the psychology of choice’, Science Magazine, vol. 211, no. 4481, pp. 453–458.