<strong>By:</strong> <b>Paul Nixon, Head of Technical Marketing and Behavioural Finance at Momentum Investments</b>

<h2><em>Local financial advisers key to helping investors manage damaging behaviours</em></h2>

Investors are exposed to an emotional rollercoaster which climbs with the exuberance that bull markets provide, and comes crashing down with panic as markets turn to bearish sentiment. Acting on these emotions, however, has been proven to culminate in an actual cost over time in the form of lower returns. This cost is commonly referred to as a “behaviour gap”.

Having analysed approximately 17, 600 Momentum Wealth investors between 2008 and 2018, Momentum Investments is able to quantify that nearly one in four investors accumulated a behaviour gap of 1% per annum (more than 10% over 10 years). During the market crash of 2008/09, however, twice as many investors (one in two) were influenced, and the behaviour gap grew to 1.1% per annum (more than 11% over 10 years).

Considering the already dire state of retirement outcomes in South Africa, coupled with the country’s shrinking economy, Paul Nixon, Head of Technical Marketing and Behavioural Finance at Momentum Investments, believes that managing this behaviour gap should be a top priority for local financial advisers.

“The behaviour 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 3.2% 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.”

According to Nixon, the best way to do 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.”

This, Nixon says, is essentially what Momentum’s outcome-based investing (OBI) score aims to do. “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 objective. It therefore acts as a lens and valuation mechanism to ensure that the investment journey and certainty of outcome are considered alongside investment performance.”

He goes on to describe the toolsets that have been developed, which 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,” Nixon explains.

There is even an OBI Income Planner Tool, which helps an adviser generate a post-retirement plan according to a client’s requirements, he adds. “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.”

Ultimately, Nixon believes that the OBI toolsets 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 toolsets 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 concludes.