There is a significant discrepancy between retail investors’ attitudes towards emotional decision-making and the recommendations of most financial advisers, according to a global survey by Natixis.
The report, which is part of the company’s Investor Insights series, surveyed 2,400 advisers across 14 different countries in regions including Europe, the Americas, Asia and the Middle East, with the aim of understanding the attitudes and needs of members of the financial services industry. Some 300 were from the UK.
Map of countries included in survey
Source: Natixis
The data shows 83 per cent of advisers believe that they need to prevent clients from making emotional decisions when it comes to their investments.
This is in stark contrast to data gathered from retail investors in Natixis’ 2015 Global Survey of Individual Investors which found that, out of 7,000 participants, less than half of them believe avoiding emotional decisions will increase their ability to reach their financial targets.
“Money and investing are among the most emotionally charged issues for individuals and families. Where an investment professional’s objective view might see figures on a statement, clients may see assets through a more personal lens – their investments represent lifetime achievements, personal empowerment and the legacy they will leave to their family,” the report stated.
“As a result of these associations, sudden and severe drops in value often lead to equally severe, emotionally driven decisions. It’s this kind of visceral reaction that often leads investors to buy high and sell low. Advisers see this response as a threat to both their business and the financial success of their clients.”
Jason Hollands, managing director at Tilney Bestinvest, agrees and says that many if not most retail investors allow emotions and therefore irrationality to drive their investment decisions, which can have disastrous consequences. 
He says this is proven through the fact that fund sales tend to rise when markets near their peaks, as formerly cautious investors convince themselves they are instead adventurous and can’t hold out on returns any longer.
However, he warns that this all changes when markets slide and, too often, a herd-like panic breaks out which results in the crystallisation of short-term losses.
“In fact if investors did the very opposite of what their emotions tell them to do, i.e. invest when markets are weak and sell when markets are high, they would be much more successful,” Hollands pointed out.
“Self-directed investors can also often exhibit signs of what a behavioural psychologist might describe as ‘anchoring’ by holding on to investments that have disappointed, wanting to wait until they have recouped their losses before moving, even when their chances of recovering wealth might be better achieved by admitting their error and investing elsewhere. This comes from a deep seated emotional need not to admit defeat.”
The Natixis survey found that this problem has been magnified through investors’ inconsistent views on risk and return. While individuals believe they will need average returns of 9.7 per cent above inflation to reach their goals, 84 per cent of those surveyed prioritise asset safety over performance.
The level of return wanted would usually require a significant amount of risk in order to be achieved, particularly as the financial advisers surveyed said that clients need an average return of 6.6 per cent above inflation to meet their long-term goals.
The research team at Natixis believe that this “irrational” view has been made by many investors because they are lacking the initial footing to make thorough and robust choices.
Some 57 per cent of those surveyed admitted they have no financial goals whatsoever while 67 per cent said they has no financial plan and 77 per cent of investors rely on nothing but instinct when making investment calls.
Again, this clashes entirely with the views of the financial advisers that Natixis spoke with, who have listed the aforementioned investment styles in the top five biggest mistakes that investors can make.
“Independently, each represents a significant problem for investors. Together, they form a perfect storm that can leave clients without clear direction on how to handle the ups and downs that are an inevitable part of the investment experience,” the report continued.
Out of the advisers surveyed, 90 per cent said their ability to demonstrate value beyond portfolio construction is becoming more and more important, which suggests that clients need to be counselled through the financial planning basics more than ever so they can deal with volatile markets.
Despite this, the report found that advisers are aware that emotional investing doesn’t always provide negative results and that it can lead to positive investment decisions, too – this conclusion was reached after advisers witnessed client reactions to a decade-long period of volatility.
Natixis found that even in regions such as Hong Kong, which demonstrates almost double the risk tolerance of any other country in the survey, the percentage of advisers who say that client emotions can be a business risk is on par with the global average.
Source: Natixis
“One might suppose that tempering the exuberance of an aggressive investor poses as many challenges as assuaging the fear and anxiety that risk-averse investors feel in down markets,” the report said.
“Perhaps what is most important to advisers in managing emotions is getting to know clients more completely. More than nine in 10 advisers in our survey group said getting a complete view on client goals and risks is the most important factor in their own business success.”