Report highlights how 2020 volatility has taken focus away from discussions of individual goals and circumstances
The return of volatility this year has understandably increased clients’ appetite for communication this year, with many conversations being shaped by market conditions. But as calming as they might be, poorly directed discussions can have an unintended and undesirable effect on people’s ability to reach their own financial goals.
In the latest Cerulli Edge—U.S. Retail Investor Edition report, Cerulli Associates reported among affluent U.S. investors with more than US$250,000 in investable assets, 55% indicated that they had been contacted by their advisor regarding broad economic conditions, but only 27% had reviewed how the client had progressed toward their individual goals.
The disparity was most stark among older respondents, Cerulli said, as 63% had discussed the economy while 23% focused on individual circumstances. Economic discussions also increased with household wealth, rising from 41% among respondents with US$100,000 to US$250,000 in investable assets to 65% among those with more than US$2 million.
“These results reflect both the relative impact of external factors on client portfolios of different sizes and the time clients have to consider them,” the report said, noting that older and wealthier clients tend to make disproportionate allocations based on macroeconomic developments in spite of the potentially detrimental impact on their portfolios.
The danger in this line of discussion, the report said, is grounded in behavioural finance. According to the report, research in the field indicates that investors seeking information that they believe will impact their portfolios are likely to sabotage their own long-term financial goals because of different behavioural investing biases including recency bias, confirmation bias, and loss aversion.
“These biases were likely contributing factors in many of the actions that investors reported taking relative to their portfolios in the first half of 2020,” Cerulli said. More than a third of the investors it surveyed indicated they’d acted to protect their current asset levels; that reached a high of 42% among investors aged 50 to 59, a group that’s most under pressure to squeeze out a few more good years of returns as they close in on retirement.
“Unfortunately, these defensive measures are often more likely to be timed such that they lock in losses rather than ward off future losses or capitalize on newly created opportunities,” the report said.
When examining how conversations with advisors affected investors’ actions, Cerulli found that the most prevalent action, reconsidering one’s overall retirement plan, was most correlated with advisors raising the issues of:
- Retirement income needs (60%);
- Progress toward goals (59%); and
- Recession planning (58%)
Tactically, they found that moves to protect current assets were most tightly linked to recession planning (62%) and discussions of retirement income needs (56%).
“The wake of volatility can serve as a powerful catalyst to initiate difficult conversations between advisors and clients,” Cerulli said, stressing that changes following such conversations should serve clients’ strategic plans rather than being governed by the biases of clients or advisors. “These conversations can be one of an advisor’s greatest challenges.”
