Trading data from Q1 shines light on benefits of professionally managed solutions
During the throes of the coronavirus selloff, several defined-contribution (DC) plan recordkeepers in the U.S. said participants appeared to be exercising wisdom, with users of their platforms reportedly heeding advice to stay the course amid the turmoil. But a deeper dive into platforms’ transaction data suggests that they didn’t exactly walking placidly amid the haste and noise.
In a new report, Cerulli Associates said that trading activity during periods of Q1 2020 showed marked increases compared to previously observed levels. Referring to the Alight Solutions 401(K) Index, which monitors the transfer activity of over 2 million plan participants at large employers, they said there were 18 trading days in March that reflected “above normal” activity.
Moreover, “participants who transacted tended to reduce their equity exposure at seemingly inopportune times.”
A more granular look from one study revealed that participants who self-direct their investments were more apt to transact than participants who were exclusively invested in managed solutions such as target-date funds and managed accounts.
In an analysis of more than 600,000 401(k) participants, Morningstar found that individuals made allocation changes at a rate that “typically occurs over an annual period, or longer” during Q1 2020; that included just 2% of participants in professionally managed solutions, versus around 17% of self-directed investors.
Morningstar also found that self-directed investing is particularly prevalent among participants in their fifties and sixties. Cerulli maintained that such investors typically stood to benefit more from personalized, professional advice offered in manage accounts, as it can help them avoid emotional biases and cognitive errors.
Citing research it did for Charles Schwab and the Investment Wealth Institute in July 2019, Cerulli said the most pronounced emotional biases among advised clients are loss aversion (26%) and inertia/status quo bias (23%). They may take on less risk than they can actually tolerate – selling investments that have risen in value to lock in gains and avoid potential future losses, for example – or take on excessive risk by holding on to a losing position in hopes that it will rebound and they can avoid realizing a loss.
Meanwhile, the most pronounced cognitive errors are recency bias (35%) – the tendency to decide or act based on recent news, events, or experiences – and confirmation bias (25%) – focusing on information that supports their beliefs at the expense of contradictory information that’s potentially valuable.
