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Understanding Investor Behavior

5 issues firms can address to make investor impact

Steve Wendel


In the financial-services industry, rarely do we rigorously assess whether our products and services are actually helping investors succeed. We know what drives our businesses, and whether a particular product could, theoretically, help investors. But our data on actual impact in practice is sorely limited, usually because we don’t have a clear vision of the rubber hitting the road: investor behavior after our products are bought or our advice is heard. That should change—to the benefit of investors and our industry.

5 issues to consider when looking to understand investor behavior 

Financial services provide many examples of a significant gap between what people in the industry intend and what actually happens—especially for the end investor. For the many companies that claim to serve the investor, Morningstar included, this gap matters because it’s part of our mission to close it. And for financial service companies that aren’t formally investor-centric, businesses built around investors eventually crumble if they aren’t helping that end client.

Ultimately, driving investor success and understanding investor behavior requires a significant shift in mindset. Here are some issues to address:

  1. Transparency: The creation of a new product-by-product, service-by-service measurement of impact would enable new transparency across the industry—showing what works and what doesn’t. This would naturally be backward-looking, based on measured actual impact, but it would help investors better judge the products that best help them reach their goals. The uncertainties of the market will never go away, but investors could better assess, in an apples-to-apples way, what each product means for them.
  2. Competition: When investors have the information they need to evaluate products by their impact, that will naturally change the dynamics of industry competition. Instead of competing on a product’s features, companies would be increasingly pushed to compete on actual impact. That’s clearly good for the investor. It also creates a business opportunity for those companies that can move and adapt quickly.
  3. Integration: One central behavioral lesson is that often small details of how a topic is framed or described can drastically affect people’s decisions. For the financial-services industry, we are increasingly seeing that the same holds true everywhere, from how companies talk about retirement savings to how the decision to sell a stock is presented. The implication for businesses is that product design, user interface, marketing, and delivery are all one integrated package that can influence outcomes for the individual. A company can (and should) improve outcomes for investors through their user interface and marketing, as much as the financial product itself.
  4. Accountability: Perhaps the most difficult issue for financial-services companies will be the redefining of accountability. Advisors in the United States are already facing the implications of being accountable for serving the best interests of clients. It’s a change that we at Morningstar have long held to be beneficial for investors and advisors. An industrywide focus on impact will, oddly enough, make meeting that standard easier by facilitating the development of a single clear metric of best interest. For asset managers and others in the industry, clear measurements of impact will necessitate changing business lines and practices that are shown to not drive impact for clients and the end investor.
  5. Trust: With accountability and transparency come respect and trust. In many segments of American society, our industry is reviled. There’s a general lack of trust of financial services—but that hasn’t historically been the norm. Through much of the 1980s, a majority of Americans had “a great deal of confidence” in banks. Now that figure is 27%, according to a 2016 Gallup poll. We should acknowledge that that lack of trust has been well-earned by a variety of bad apples and by high-profile abuses. By focusing on the needs of the end investor and showing where industry efforts are—and aren’t—beneficial for investors, we can start to rebuild that trust.

Focusing on impact

The overall lesson is this: Wanting to help investors isn’t enough. Over the past few decades, great strides have been made in helping investors reach their goals, including lower fees, more transparency, and better-aligned incentives. To drive impact more effectively moving forward, we can significantly tighten the link between our intentions and our impact. And that starts with understanding investor behavior: what happens after we give advice, offer information, or create a financial product.

This blog post is adapted from an article that originally appeared in the Feb/March 2018 issue of Morningstar magazine. Read the full article or subscribe to the magazine for free. 

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