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The 2010 Behavior Survey: Investors Using Advisors

More results from our attempt to connect real people with behavioral finance theory.

Michael M. Pompian, 11/18/2010

For the past five weeks, we have been reviewing the results a survey I created in February 2010 that was completed by 980 individual investors who subscribe to either Morninstar.com and/or Morningstar investor newsletter publications. The purpose of the survey was to gauge investing behavior and choices and how influential these choices are in the investment decision-making process. The survey was also done to learn more about the four behavioral investor types that I developed (that we have been reviewing over the past two and a half years) and how financial advisors can be better prepared to work with them. Of the 980 surveys that were completed, 308 were completed by investors that use financial advisors. For the next five weeks we will be reviewing answers to bias questions of investors using financial advisors. This information can be highly relevant to advisors in their quest to serve clients in the best way possible. It is important to remember that the Morningstar investor survey is composed of a very specific type of investor population so let's review that now. (More details on the survey can be found in the original article.)

About the Survey-Takers
As you may recall, the population of survey takers in the Morningstar universe was generally defined as "mostly male, mostly experienced [experienced having a double meaning here--experienced in the sense that they are not new to investing and experienced in the sense that that over half of the survey takers were over 60 years old], and mostly do-it-yourself" investors. What this means is that the majority of survey takers were proactive, engaged and self-directed investors which, naturally, is only a subset of all investors. The populations of survey takers that use financial advisors are likely to be somewhat less self-directed but we can assume since they subscribe to Morningstar services, they are still somewhat self-directed. It is important to remember not to extrapolate what is learned in this set of articles to the general population of investors because it contains many passive and/or unsophisticated investors as well as "middle of the road" investors who are somewhat engaged but don't have the time or aptitude for more. And of course, the general population of investors contains a higher percentage of women and young investors. For simplicity, I will call the investors who took the survey that use financial advisors "PEM-FA investors" going forward to stand for Proactive, Experienced and Male investors who use financial advisors. A statistical description of the survey takers working with financial advisors can be seen in these charts.

(View the related graphic here.)

(View the related graphic here.)

Behavioral Biases of "PEM-FA" Investors
As many readers know, the building blocks of behavioral investor types are the 20 behavioral biases I outline in my book, Behavioral Finance and Wealth Management. It will be incredibly insightful for us to examine how prevalent each bias within the population of PEM-FA investors. Why? If advisors can better understand what biases their clients have, they can be in a much better position to advise them. Classic examples of situations when this can help occurred during the market crises of 2000-2002 and 2008-2009. Many clients called their advisors and asked them to "get out" of the markets. This happened because their behavioral biases and emotions were taking over their rational decision making processes. This is exactly the time that advisors need to "step up" and make sure their clients don't sabotage their long-term investment plans. Just think about what would have happened if you let your clients sell out during March 2009. They would be much worse off now in terms of meeting long-term financial goals.

In addition, we can also see on the chart below that even though the age of the clients is skewed older, risk tolerance is still fairly high. In the context of what we have learned about behavioral investor types, active investors (Independent Individualists and Active Accumulators) which we typically think of as younger investors have a strong proclivity toward certain biases so it will be interesting to see if these biases resonate with PEM-FA investors. With medical technology and information aplenty about living longer, it could be argued that 60 year olds have a 30 year plus time horizon--so perhaps this population is thinking in a new way that isn't in synch with the average advisor. Lastly, we need to also recognize that even risk tolerant investors, regardless of age, will have biases associated with conservative investors. Human behavioral study cannot be made equivalent to other sciences like chemistry where it is know exactly what is taking place (H2O will always make water, for example.)
(View the related graphic here.)
Another useful information source for FAs relates to a set of questions that demonstrate how PEM-FA clients think about their financial advisors. As you can see in the chart below, about 87% of clients agree or strongly agree with the question about getting deeply involved in the details of how their money is invested. In addition, over 50% agree or strongly agree about looking at their FA as a partner rather than just a service provider. This is great news. What is interesting to note is that only 17.5% strongly agree with the question about relying on their financial advisor to look at their total wealth picture. I would have expected this number to be higher. There are some other very useful answers to questions so please take a moment to study this chart.
(View the related graphic here.)
In next month's article, we will be reviewing how PEM-FA investors answered questions related to biases of passive, low-risk-tolerant investors (Passive Preservers.)

Michael M. Pompian, CFA, CFP, is an investment consultant to ultra-affluent clients and family offices and is based in St. Louis. His book, Behavioral Finance and Wealth Management, is helping thousands of financial advisors globally build better relationships with their clients.

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