INVESTORS are exposed to an emotional roller-coaster, which climbs with a bull market and comes crashing down as market sentiment turns bearish. AP
Considering the dire state of retirement outcomes, coupled with the shrinking economy, investors’ “behavioural gap” should be a top priority for financial advisers, says Paul Nixon, the head of technical marketing and behavioural finance at Momentum Investments.

Nixon says investors are exposed to an emotional roller-coaster, which climbs with a bull market and comes crashing down as market sentiment turns bearish, and acting on these emotions results in a cost in the form of lower returns. This cost is commonly referred to as a “behavioural gap”.

Dixon says 17600 Momentum Wealth investors have been analysed between 2008 and last year. It was found that nearly one in four investors accumulated a behaviour gap of 1 percent a year, more than 10 percent over 10 years, and during the market crash of 2008/9, twice as many investors were influenced, and the behavioural gap grew to 1.1 percent, or more than 11 percent over 10 years.

“The behavioural gap is essentially a form of self-sabotage to investors’ future financial success, and our research shows that it is both bigger and wider-reaching in tough economic times. Given that the economy shrunk by a shocking 3.2percent in the first quarter of 2019, South African financial advisers should be playing a pivotal role in making investors aware of their behaviour, and helping them avoid such unnecessary costs to ensure that they are best positioned to reach their investment goals,” says Nixon.

He says the best way to this is to shift investors’ focus away from tracking arbitrary market benchmarks and towards goal-based investing and personal benchmarks.

“Advisers need to encourage their clients to focus and anchor on their personal investment objectives so that they don't make impulse decisions that could compromise their journey to financial success,” he says.

Nixon says this is essentially what Momentum’s outcome-based investing (OBI) score aims to do. He says investing is a complex decision, particularly for those who don't know anything about it.

He says Momentum is pioneering a valuation tool that provides a score out of 100 to assess a portfolio's track record in delivering a stated investment journey, and certainty of outcome is considered alongside investment performance. Nixon says the tool sets that have been developed use the OBI score to help advisers select and compare portfolios that will deliver on their clients’ chosen outcomes.

“These tools compare a portfolio to all other registered portfolios in South Africa and provide visual evidence that empowers the adviser to move the conversation away from market benchmarks and prevent too much focus from being placed on annual performance. Rather, success is defined as the extent to which a portfolio delivers the outcome, and is based on the investment journey and its ability to achieve the stated objective. So a portfolio with a higher OBI score will have hit the mark more consistently, with a superior investment journey over the analysis period,” says Nixon.

He says there is also an OBI income planner tool, which helps an adviser generate a post-retirement plan according to a client's requirements.

“This tool allows an adviser to maximise the income score that will provide the best balance between outcome and journey risks. You can also focus on maximising income replacement or minimising outcome risk, which enables you to create a more tailored journey and portfolio that will suit your client,” he said.

Nixon says the OBI tool sets will empower advisers to talk to their clients about the things that really matter.

“While investment performance will always be important, the OBI score and tool sets show this performance in the context of a client's personal benchmark. This will help to visually depict why chasing performance can be a dangerous gamble and equip advisers with the tools necessary to close the behaviour gap among South African investors,” he says.

PERSONAL FINANCE