2022 Sci Fi Report | Shifting the focus to investment behaviour
Paul Nixon, Head of Behavioral Finance at Momentum Investments
A warm welcome back to the 2022 edition of the Momentum Investments Sci-Fi report. This issue is packed with South African investor behavioural insights in discretionary units trusts but we have also added other investment products from which to gain comparative behavioural insights. Added to this edition is investor behaviour in the Retirement Income Option (RIO) and insights from MGIM will also soon be added.
During the year we also published some insights into the disposition effect with Momentum Securities execution only (unadvised) traders with a staggering effect size of 3.92 during the COVID period. In a nutshell this meant that traders highly became risk averse (avoided trades in a loss position – less than 20% of trades in a losing position). What does this tell us about elevated levels of switching activity on the Momentum Wealth platform? Likely that the adviser has a big role to play in client behaviour.
In 2022 we also collaborated across the business on a few projects, the most notable being the formation of a multidisciplinary team to investigate using behavioural science principles to increase member preservation in Momentum Corporate. Our project manager, Marinda Luttig, from Momentum Financial planning (MFP) writes about our approach using the ABCD framework used by the Organisation for Economic Co-operation and Development (OECD) in Europe in this report.
While the pandemic is now firmly in the rear-view mirror, this uncertainty has been replaced with rising prices, rising geopolitical tensions and interest rate hikes. Now is a great time for advisers to put a solid stress inoculation plan together for clients. To assist in doing this there is a great article by Prince Sarpong (University of the Free State), wealth management guidance from global thought leader Greg Davies from Oxford Risk in the United Kingdom (UK) as well as a financial therapy infographic in the appendix. These are all geared to help advisers with practical advice insights for client conversations. Investors and advisers both will need to deal with continued uncertainty. Switching investment strategies regularly is not a great way to tackle the new normal. Even with a negative overall behaviour tax*, our machine learning archetype (risk behaviour analysis) highlighted that 27% of investors still had a high behaviour tax (the Assertive archetype). This is an example of our (or our advisers’) inherent risk preferences creating roadblocks to achieving investor goals. It’s not all doom and gloom though. We are also delighted to support the practical use of psychology in financial planning by launching South Africa’s first money fingerprint.
This assessment can be completed in layers over time and will allow advisers to gauge their client’s long-term risk attitudes (risk tolerance) as well as their likely risk behaviour in the short term. Should the adviser see value they can also assess their clients’ money attitudes, providing deeper insights into their relationship with money, for example whether they use it to express themselves or influence others. Does money cause anxiety and stress that may be associated with hoarding? The final layer of the fingerprint gives the adviser the ability to assess markers that are part of their personality and what this could mean for their financial behaviour.
Are they present oriented (inclined to spend) or future-oriented (inclined to save) revealing those that can benefit from coaching the most. These will provide invaluable insights to the practitioner as well as Momentum Investments as we finetune our value proposition and enable financial advisers to move into the new age of financial therapy with the tools and techniques to manage or even eliminate the behaviour tax. Please feel free to reach out to me for more information or even a coffee chat about our coming behavioural finance plans and projects.
Download the report in PDF – click below…