In crisis times, private banks juggle reason and emotion – of both clients and advisers, Swiss finance professor Teodoro Cocca writes in an exclusive essay for finews.com.

There's no road map for tumultuous chapters in financial markets like we're experiencing now – especially when they move with unprecedented speed, and are accompanied with a media-driven doomsday mood.

From analyzing client behavior following the 2008/09 crisis, we can draw some lessons to help in the current situation – even if every crisis has its own dynamic and the coronavirus outbreak isn't directly comparable to the subprime crisis in many respects.

Extreme, Pervasive Uncertainty

Nevertheless, private bankers and their clients experience similar and sometimes unexpected thought processes and behavioral pattern  in times of pervasive uncertainty – especially when looking at a market phase in hindsight.

This makes for a helpful leitmotif to escape the current hysteria: how will investors view the coronavirus outbreak in a few months time? We can draw several conclusions on mastering the crisis from surveys conducted with investors between 2010 and 2012.

Panic-Buying Stocks

In response to tanking financial markets, wealthy clients could be divided neatly into one-third which didn't change anything during the crisis, one-third which sold securities, and one-third which bought them. The group of super-rich clients proved contrarian and bought a massive amount of stock – despite an above-average aversion to risk and a conservative investment profile.

This translated into buying more when stocks fell. The strategy requires mettle, but paid off. Private banking clients are definitely more interested in buying and selling stocks amid big market tumbles than retail clients are. The portion of super-wealth clients acting anti-cyclically (buying) as well as pro-cyclically (selling) higher than in retail banking.

Fevered Search for Havens

The hunt for safe harbor from inflation (a real fear at the time) or other worst-case scenarios (collapse of the banking system) drove clients into cash and gold: roughly half of the wealthy client surveyed at the time hiked the allocation of gold in their portfolios.

Notably, a substantial number of them became so frantic that hey invested a huge portion of their net worth – up to three-quarters – in this asset class. Herd-like behavior on a grand scale is one hallmark of market turmoil and it imperil the safety of haven assets by skewing prices, especially for later-comers in the herd.

Irritation vs Relief

Two common emotions dominate with investors: one is irritation about missing out on returns, since many sell as market losses worsen and then miss the (almost always) sudden, surprising rebound and are late re-entering the market. The other is that investors viewed their returns, against the backdrop of the doomsday mood towards the end of 2008 and beginning of 2009, as not entirely disastrous.

A sense of relief not to have gambled away their entire net worth was palpable. Roughly 40 percent of the wealthy clients felt fear during the crisis that they would lose their material livelihood. The numbers also illustrate that these fears receded – or were oppressed – after a relatively short time.  

Persuasive Wealth Managers

How satisfied were clients with the advice of their banks during the crisis? Surprisingly, indicators for client satisfaction remained steady even as markets were roiled.

Wealth managers in particular seem to have successfully understood that staying close and intensifying advice kept clients happy or even elevated their satisfaction with the bank. The major banks came away from the crisis somewhat more battered in this respect, though it must be noted that they came under considerable financial pressure at times themselves during the crisis.

Advice vs Self-Determination

The number of self-determined clients has risen since the financial crisis. Private banking clients were left wanting on what banks prised as safe investment strategies. Time and again, this disappointment prompts investors to take matters into their owns hands, or at least to leave their adviser.

By contrast, especially in advice-heavy client relationships like those typical for wealth managers, client satisfaction remained very high during the crisis. This may indicate that clients who weren't advised often and extensively decided to forgo the services of a private banker altogether.

In phases marked by a high degree of uncertainty and a sense of helplessness due to the pace of events in a crisis, demand for providers who define themselves as navigators surges. This is not least because many clients perceive themselves to be uninformed and clueless.

Knowledge Doesn't Stop Irrationality

The sobering lesson from the last crisis is that more knowledge doesn't protect against irrationalism. Investors are guided by immense psychological factors, even with good financial knowledge. This also and especially applies to private bankers themselves. This misjudgement is even more dangerous because knowledge works with a higher willingness to take risks.

That means the perception of knowledge affirms one's decision-making, and tempts one to make riskier decisions. The returns of investors with a high level of financial expertise and those with no or just basic knowledge shows little difference during the last financial crisis. Being knowledgable about financial markets fails to prevent neither irrational decision-making nor losses.

Looking for Crisis Parallels

The way that wealth management clients looked back at their behavior during 2008/09 serves as a reminder to avoid a herd-like mentality in the current market, but also lends hope for after the crisis.

We don't know when, but eventually we will have endured this crisis. Then, looking back at our behavior in these weeks and months, we will recognize parallels from 2008 to the current crisis.

Teodoro Cocca is a professor for asset and wealth management at Johannes Kepler University in Linz. Before joining the university in 2006, he worked in investment and private banking at Citibank for a number of years. He was a researcher at Stern School of Business in New York and a lecturer at Swiss Banking Institute in Zurich. The Swiss, who has Italian roots, is an adjunct professor for private banking at Swiss Finance Institute (SFI) in Zurich. He advises financial firms and government bodies in Switzerland and abroad. Since April 2011, Cocca has been a member of the board at VP Bank in Vaduz and heads the bank’s strategy and digitization committee.