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Does Behavioral Coaching Help?

Financial DNA Market Mood for Advisors_April 2015

The ROI of addressing the human side of wealth management has long been questioned. However, we intuitively know that behavioral management of the advisor and client is the primary driver of the end result. There is so much benefit for clients in having a financial advisor who is prepared to behaviorally coach them.

For the past 21 years Dalbar has been producing its Quantitative Analysis of Investor Behavior (QAIB) report which demonstrates that investors underperform the market by a wide margin:

  1. The average equity mutual fund investor underperformed the S&P 500 by a wide margin of 8.19%. Further, the broader market return was more than double the average equity mutual fund investors return. (13.69% vs. 5.50%).
  2. In 2014, the 20-year annualized S&P return was 9.85% while the 20-year annualized return for the average equity mutual fund investor was only 5.19%, a gap of 4.66%.

Given these gaps, it begs the question as to the role of the financial advisor as a behavioral coach to keep clients out of their own way from making sub-optimal decisions. Also, this brings up another question, why dont investors hire a financial advisor? Do they think they can do better or is it lack of trust or high fees?

The Dalbar QAIB report for 2015 confirms the Vanguard Alpha Advisor report which values behavioral coaching at 150bps per year. This is a significant ROI.

Underneath all of this, if the advisor has a practical way of holistically understanding their clients financial personality and the behavioral intelligence at their finger tips to use such insights on a real-time basis then they can easily be a behavioral coach. Have a look at the Financial DNA Market Mood Dashboard at www.financialdna.com

 

KEY FINDINGS AS OF 2015

  • In 2014, the average equity mutual fund investor underperformed the S&P 500 by a wide margin of 8.19%. The broader market return was more than double the average equity mutual fund investors return. (13.69% vs. 5.50%).
  • In 2014, the 20-year annualized S&P return was 9.85% while the 20-year annualized return for the average equity mutual fund investor was only 5.19%, a gap of 4.66%.
  • In 2014, the average fixed income mutual fund investor underperformed the Barclays Aggregate Bond Index by a margin of 4.81%. The broader bond market returned over five times that of the average fixed income mutual fund investor. (5.97% vs. 1.16%).
  • Retention rates are

- slightly higher than the previous year for equity funds and

- increased by almost 6 months for fixed income funds after dropping by almost a year in 2013.

  • Asset allocation fund retention rates also increased to 4.78 years, reaching their highest mark since plummeting to 3.86 years in 2008. Asset allocation funds continue to be held longer than equity funds (4.19 years) or fixed income funds (2.94 years).
  • In 2014, the 20-year annualized S&P return was 9.85% while the 20-year annualized return for the average equity mutual fund investor was only 5.19%, a gap of 4.66%.
  • In 8 out of 12 months, investors guessed right about the market direction the following month.

Hugh Massie

Hugh Massie - President and Founder of DNA Behavior International

Hugh Massie is a Behavioral Finance Strategist helping people and organizations worldwide "behavioralize money". His purpose is to guide people to be Behaviorally SMART for achieving greater financial empowerment so they can live with meaning and unlock their human potential.

Hugh liberates investors, advisors and organizational leaders with a unique blend of financial personality and economic insights to make improved life, financial and business decisions.In particular, he helps people become more self-aware so they do not make emotional decisions under pressure which sabotage their relationships and long-term horizon goals.

Hugh has over 60,000 hours of experience serving millions of investors with assets of $1 to $1 billion+ and the leaders of more than 2,500 businesses in 123 countries. (www.BehaviorallySmart.com)

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