Head of Defined Contribution and Wealth Advisor Services Matt Sommer discusses how financial professionals can be instrumental in boosting clients’ investing confidence and helping them stay focused on long-term goals – even in the most challenging market environments.
I recently wrote an article outlining timely thoughts to help investors deal with today’s worst challenges. In the roughly five weeks since that article’s publication, many of those challenges have intensified. Inflation in particular has gotten steadily worse in many markets globally, notably in May reaching 40-year highs of 8.6% in the US1 and 9.1% in the UK2, and a record high of 8.1% in the eurozone3.
Along with rapidly rising costs – which are arriving just in time to derail vacation plans in the northern hemisphere now that people are finally starting to feel comfortable travelling again – ongoing stock market volatility continues to keep investors on edge.
Given my background in behavioural finance, I can’t help but view what is happening – and people’s reactions to it – through that lens. I am all too aware of the fact that volatility and the associated fear of loss can lead to various behavioural traps that can cause investors to make irrational (and often unwise) decisions. And as someone who has spent nearly three decades in the financial services industry, I can’t help but think about the role financial advice plays in managing the emotions that can lead to those traps and ultimately those bad decisions.
So I felt it was a good time to revisit a study I helped conduct in 2020 with fellow researchers at Kansas State University. Published under the title, “An Investigation of the Relationship Between Advisor Engagement and Investor Anxiety and Confidence,” the study produced findings that have important implications for advisor-client relationships during stressful market and economic environments like the one we find ourselves in now.
Key finding: financial guidance boosts investing confidence
Most of the past research on the costs and benefits – both perceived and actual – of professional financial advice has focused on portfolio performance and return generation. While arguably more difficult to quantify, another expected outcome of engaging a financial professional is increased investing confidence. Thus, the key question posed in our 2020 study was, “Performance aside, are investors who receive professional guidance more likely to feel confident making important financial decisions than those who go it alone?”
Our study not only confirmed a positive relationship between advice and confidence, it found that respondents who worked with a financial professional were twice as likely to be confident in their ability to meet their investing goals than those who did not work with a financial professional.
In my view, this finding has never been more relevant than in today’s market and economic environment, where fear and uncertainty are the primary emotions guiding investors’ decisions. Confidence is a significant factor in an investor’s willingness to stay invested through even the most difficult market conditions. And the guidance of an experienced professional – one who can put the current environment in perspective and help take some of the emotion out of investing – can be instrumental in helping investors remain committed to their long-term goals.
Furthermore, to go back to the challenge I referenced initially, adding inflation into the mix exacerbates the fear of loss that can cause investors to make irrational decisions, such as reallocating their portfolios into cash. Arguably, the rational thing to do when prices of goods and services are rising is to consider investments that have the potential to outpace inflation – which cash never will. That’s why goal setting – and the confidence required to stick to those goals – is such an important aspect of the advisor-client relationship.
Of course, it’s understandable that investors may feel reluctant to pay for financial advice at a time when they’re cutting costs to deal with inflation. But for those who are grappling with the decision to hire or continue using a financial professional, the potential positive impact on their investing confidence should most certainly be included in the cost-benefit analysis. After all, a financial professional’s proven ability to boost clients’ confidence and help them stay invested could be considered “priceless” – especially in exceptionally challenging times like these.
Volatility: The rate and extent at which the price of a portfolio, security or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. Higher volatility means the higher the risk of the investment.
1“US Inflation Quickens to 40-Year High, Pressuring Fed and Biden.” Bloomberg, June 10, 2022.
2“UK inflation hits 9.1% as prices rise at fastest rate for 40 years.” BBC, June 22, 2022.
3“Euro zone inflation confirmed at record high 8.1% in May.” Reuters, June 17, 2022.