Here’s a story: a few years ago, a Fidelity study found the firm’s best-performing portfolios belonged to people who forgot they had accounts. In some versions, the account with the best performance belonged to a client who was dead.
Here’s a story about that story: it’s not true. The apocryphal tale originated with an anecdote on a podcast that was then reported in the business media. Efforts to track the anecdote to its source turned up nothing, and Fidelity has denied producing the study.
There’s something morbidly appealing about a corpse outperforming the active minds tinkering with portfolios to their own detriment. Maybe that’s why the story itself won’t die. The tale was recounted at a Toronto event last year, and Fidelity acknowledged it still receives inquiries about the “zombie” study.
The story weaves together two threads central to wealth management: there’s more news than ever before to consume, but not all of it is helpful, let alone accurate; and it’s extremely challenging to prevent clients from acting on this flood of information.
The amount of data produced in a day is staggering. Roughly 300 billion emails will be sent in the next 24 hours, and 500 million tweets will be posted. Every two days, we create as much information as we had in human history up until 2003, according to former Google CEO Eric Schmidt. And he said that 10 years ago.
“We’re in some sort of information overload,” says Craig Basinger, chief investment officer and portfolio manager at Richardson GMP in Toronto.
News travels faster than ever and often comes in bursts on a particular topic, he says. This creates a rush to respond as investors update their opinions and valuations while trying to absorb the new information. This can lead to overreactions.
David Lewis, chief client officer at BEworks in Toronto, says the internet has also compromised the idea of expertise. The news environment used to be more heavily mediated, relying on qualified experts. The internet has created room for more diverse perspectives, but it’s also provided a soapbox for anyone with an opinion.
“The average investor doesn’t have the expertise to separate the nonsense from the good advice,” Lewis says.
This creates an opportunity for advisors. Cory Clark, chief marketing officer at Dalbar in Marlborough, Mass., says the news environment has opened up a coaching role that didn’t exist 10 or 20 years ago. Advisors need to be able to help investors “deal with the stimulus that they’re getting from all different angles,” some of it promulgating fear or greed.
“There’s so much more information out there to impact behaviour than there ever was before,” he says. “It’s something advisors really need to think about as part of their practice and as a way to add value.”
Learning to do nothing
Darren Coleman, senior vice-president and portfolio manager, private client group, at Raymond James in Toronto, finds himself empathizing with doctors in the age of WebMD and other sites that enable self-diagnosis.
“We have a similar challenge to doctors, where somebody shows up and says, ‘Oh my god, I must have dengue fever,’” Coleman says.
“You have to take the client seriously from an emotional perspective, but you also have to step back and say, ‘What are the symptoms?’ and go through your regular protocol. They’re being bombarded with so much information; it’s normal for people to be confused.”
Advisors may not have an easy time curtailing clients’ news consumption. Many young clients have grown up researching every purchase, reviewing options exhaustively online. For some, it won’t be any different with investments, and they’ll expect their advisor to be at least as informed as they are.
New retirees who suddenly have a lot of time to kill may find themselves watching more business news and worrying about the latest geopolitical flareup. Associating with other retirees may reinforce certain predilections.
Advisors can help clients become smarter news consumers, though. Basinger encourages his team to read, watch and listen to news that offers contrary perspectives.
“We all suffer from confirmation bias, where we want to read things that support our pre-existing opinions or views,” he says. “Forcing yourself to consume the other side, even though it might not change your mind, will at least open your eyes to the other side of the argument.”
Encouraging smarter news consumption is the start; the bigger job is managing what clients do with the information. Just because the news is updated every second doesn’t mean accounts have to keep up. Training clients to do nothing can be surprisingly difficult.
“We’re coded to want to do two things: protect what we have, and react,” Basinger says. “Not doing anything when you hear news is very difficult for some people, and I think that can very often lead to making mistakes.”
Basinger and his team calculated the potential damage from those mistakes. Using Bloomberg data, researchers at Richardson GMP examined the cost of reacting to market weakness over the last 30 years. Investors who started with $10,000 in an all-equities portfolio and held it would have had $150,000. Those who sold every time the market dropped 7.5% and sat in cash for six months would have had $86,000 at the end of the period.
Speaking as he was at the end of a historic bull run skews the results, Basinger says, but it’s still a useful comparison. People want to react to events, and moving into cash is action, he says. It’s also damaging to portfolios.
Various studies support a buy-and-hold strategy. The most famous was conducted by University of California researchers in 2000. They examined data from 66,000 households and found that those who traded frequently earned average net annual returns of 11.4%; those who traded infrequently over the same period earned 18.5%. The conclusion (and the paper’s title): trading is hazardous to your wealth.
“The media causes people to pay attention to their account when they should be just letting the strategy work,” Lewis says. “They’re encouraged to overtrade and that harms their returns.”
The discrepancy goes beyond commissions and trading expenses, Lewis says. Loss aversion — the idea that people experience more pain from losses than they do pleasure from equivalent gains — drives destructive behaviour.
“One of the results of anxiety and loss aversion is information search: people tend to look for information to reduce that anxiety,” he says.
This search for reassurance may lead to places that are least likely to provide any, such as social media and 24-hour news networks. Getting hourly updates on the markets — or on geopolitical concerns, such as the number of new coronavirus cases — can make clients think action is needed.
“It’s an interesting behavioural tendency: we feel like if we’re not doing anything about this, then it means I’m ignoring the problem,” says David O’Leary, founder and principal at Kind Wealth in Toronto.
But following the markets too closely “makes time feel like forever,” he says. “If you look numerous times per day, a month is going to feel like a year.”
Lewis compares the behaviour to weight loss studies. People who checked their weight daily and tried to make sense of minute changes became more anxious. Those who checked once a week were less anxious, made better health decisions and were ultimately more successful at losing weight.
“The parallel with your investment portfolio is, if you’re looking at it to the penny every day, it forces you to make short-term decisions rather than long-term decisions. It becomes self-defeating,” Lewis says.
Advisors should have clients commit to only checking their portfolios quarterly, he adds.
“There’s an old joke in our business that says, ‘An investment portfolio is like a bar of soap: the more you touch it, the smaller it gets,’” Coleman says.
Roadblocks to good behaviour
Oddly, compliance can pose challenges to a long-term, buy-and-hold strategy. As more advisors move to fee-based books, clients and even compliance departments may start asking whether investors are overpaying.
“One of the best ways we help the client is to make them not trade,” Coleman says. “We occasionally get queries from our compliance people in our fee-based accounts saying, ‘The way the math works, that client was entitled to do 360 trades last year and you did six. Please justify why you only did six.’”
That is the justification, Coleman says: keeping the number of trades low is how advisors add value. Rather than using trading activity to justify fees, he says, compliance departments should be looking at advisors’ planning work and client satisfaction.
Doing nothing is becoming even harder as portfolio access gets more user-friendly. Academics from Chongqing University in China, who observed user behaviour on 183 Chinese financial institution apps, found that the more often users checked the apps, the more frequently they traded.
Advisors touting their firms’ own digital platforms will have to issue similar warnings: just because it’s easy to use doesn’t mean clients have to use it.
But many will, Clark says, especially to check their account value and performance. Firms have a design choice: performance numbers, which may encourage detrimental behaviour, don’t need to be the first things clients see when they log in.
A better option, Clark says, would be for online portals to default to a page or pop-up showing the client’s investment goals and probability of achieving them. “You can control what you emphasize and how you augment that experience to get away from performance chasing,” he says.
A client’s investment mix may also affect their vulnerability to loss aversion, says O’Leary, a fee-only financial planner who doesn’t sell investments.
“A passive investment strategy can go some way to mitigating some of that fear- and greed-driven behaviour around investments,” he says, because clients understand they’ve bought the market. “You at least remove one portion of the angst and anxiety that investors face when their investments go up or down.”
When an advisor helps clients stay “relentlessly focused” on goals, investment performance becomes less important, he says. “If you’re meeting your annual 6% goal, for example, then it doesn’t matter if your neighbour did 12% in some small-cap equity fund.”
Incorporating clients’ values into their investments can also mitigate harmful behaviour by adding another parameter outside of performance, O’Leary says. “Client investment behaviour improves quite considerably when the reason why they’re purchasing an investment extends beyond just the return.”
There are also solutions for clients who may not be able to help themselves. Advisors can solicit pre-commitments from clients to remain invested unless the market declines by a certain percentage — ideally around 20%, Lewis says. This can encourage clients to stay with the plan.
Advisors can also try to use mental accounting — a behavioural bias associated with detrimental behaviour — to clients’ advantage, he says. Mental accounting refers to the way people divide their money into different mental accounts. Treating all money as interchangeable can prevent harmful behaviour such as saving for a vacation while carrying credit card debt, or treating tax refunds as windfalls.
When it comes to overreacting to news, however, Lewis says mental accounting can be useful. If clients want to check their investments daily or tinker with their accounts based on what they’re seeing in the news, they should have an account where they can do so. This activity would be limited to 5% of the portfolio, with the other 95% needed for retirement or other goals safely out of mind (and reach).
Dalbar has gone further, creating an “investor panic relief tool” designed to resist a client’s flight reflex. Clark says advisors can use it at the start of a downturn as clients start to panic and want to go into cash.
“You’re never going to time the re-entry point and you will leave money on the table almost every time,” he says.
The tool offers an index put to protect against losses over a given period without making the whole portfolio defensive.
Helping clients understand the behavioural heuristics to which they’re susceptible can be an important step, Clark says.
“Not that advisors want to become psychology professors, but to make [clients] at least aware of some of the forces that may be influencing them” would help.
There may also be a silver lining to clients’ behavioural responses. Studies have shown an “ostrich effect” when responding to investment news — that is, a tendency to bury one’s head in the sand when faced with bad news.
The Chongqing academics found evidence of the ostrich effect in their study of trades using financial apps: users checked the apps far less frequently during periods of volatility and low market returns. A 2015 study from researchers at Columbia and Carnegie Mellon universities found online account logins fell 9.5% the day after a market decline.
The Fidelity study about account activity may not exist, but clients’ willingness to ignore bad news would play into the alleged benefit: even living clients may be inclined to play dead.