- Wealthy investors have become highly pessimistic about the economy and stock market due to ongoing volatility and downturns. Many investors are losing patience and making irrational changes to their portfolios without consulting their advisors.
- Goals-based investing focuses on aligning investment strategies with clients' specific financial goals rather than short-term performance. This approach can help address investors' behavioral biases and irrational decisions by keeping them focused on their long-term goals.
- Advisors can use goals-based investing to differentiate themselves, deepen relationships with clients, and better manage client expectations and behavior during periods of market uncertainty.
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Sei advisor investor-behaviorarticle
1. Pessimism among wealthy investors has peaked and the percentage of
investors who patiently adhered to long-term investment strategies during
the market downturn was minimal at best.
Even now with glimmers of stabilization peeking out from behind the clouds, wealthy investors still have a
healthy dose of skepticism of the markets. Affluent investors are evaluating their investments and making
changes based on sound investment advice, but many have failed to contact their advisors for assistance,
reflecting a surprisingly high level of dissatisfaction with advisors.
Overall, research suggests investors are losing patience with the markets and the advice they’ve received.
This actually creates an opportunity, particularly for advisors who can offer rational ways for investors to
see beyond current market volatility – especially Goals-Based Investing.
Investors’ patience may be at an end
During October 2008, despite a clear crisis in confidence and significant declines in asset value, more than
one-half of high net worth investors did nothing, according to research from Phoenix International Marketing.
They did not make changes to their investment strategies and, perhaps as importantly, the vast majority did
not contact their financial advisor for advice about how to proceed in a time of economic upheaval.1
1
Phoenix Marketing International, October 2008.
Goals-Based Investing
Protecting advisor assets, while helping investors rethink and re-plan
2. Goals-Based Investing
On March 4, 2009, the newly released Spectrum
Millionaire Investor Index®
showed that wealthy investors
had become extremely pessimistic about the economy and
stock market. The index fell 13 points in February, nearing
a record low. This pessimism was reflected in separate
research from Phoenix Marketing, which showed that,
between October 2008 and January 2009, the percentage
of affluent investors who were staying the course and making
no changes to their portfolios, dropped from 54 percent to
37 percent, as you can see in the below chart entitled,
Affluent investors – new realities, new attitudes.2
Nearly every financial advisor knows clients are oftentimes
their own worst enemy – all too eager to make an irrational
decision that will negatively impact their wealth or
jeopardize goals. While one client insists on buying the
latest hot stock after there’s been a run up in price, another
is panicked by market volatility and is ready to abandon
a well-chosen strategy.
Clients making those decisions are acting out irrational
investment behavior. Documented by a variety of research
studies, behavioral finance has assumed its rightful place
in wealth management and portfolio decision making.
PAGE 2
0% 10% 20% 30% 40% 50% 60%
Did nothing differently to date
Contacted current investment advisor
Shifted retirement assets to safer option
Bought stocks, bonds, or other investments
Moved assets from stocks to safer option
Pulled assets out of retirement plan
Changed primary investment provider
Changed primary investment advisor
Sought advice for first time
Oct – 08 Dec – 08
2
This chart includes data from two reports published by Phoenix Marketing International, October 2008 and March 2009, measuring the attitudes
of affluent investors.
Affluent investors – new realities, new attitudes2
The client chasing a hot stock is engaging in activities
called “herding” or “barn door closing.” The investor who’s
ready to abandon his strategy is experiencing “myopic loss
aversion.” And the prospect with baseless opinions is
guilty of “overconfidence.” Researchers have identified
no less than 14 distinct behaviors, any one of which can
unravel an investor’s goals, shrink exit wealth and
potentially damage the advisor-client relationship.
The key to helping clients see through these markets is to
help them focus, not on daily headlines or commentaries
from television pundits, but to focus on their financial goals.
More importantly, for advisors to help clients, they need to
better understand investor behavior and incorporate a goals-
based investing approach and corresponding investment
strategies into their client process. This research-based
approach to wealth management will help you prevent
clients from engaging in counterproductive behavior.
As you will see, the current market environment presents
a timely opportunity for advisors to introduce some fresh
thinking to their clients and prospects.
3. Tools and benefits for the advisor
Advisors who adopt the goals-based approach are provided
a range of tools to help them communicate and service
existing clients during challenging markets and win new
clients to help them grow. The SEI Proposal Tool provides
clients and prospects a Personalized Wealth Program,
which helps them understand the value of selecting
investment strategies in the context of financial goals and
dreams. Services like automated portfolio rebalancing,
dynamic portfolio management and industry first “progress
to goals” tracking account statements help them see how
their portfolio evolves over time according to their goals,
not a disconnected benchmark. The SEI goals-based
investment process can help financial advisors deal with
irrational investor behavior.
Advisors who work with SEI confirm the effectiveness of
this approach. Matt Carpinelli, of AFC Investment Advisors
Inc. located in Denver, CO said discussing goals with
clients takes the focus away from beating benchmarks and
performance. “It’s much easier to have a constructive
conversation when it’s about goals versus performance,”
he said. Not only do the strategies differentiate him in his
market, but he’s never lost a client who’s using the goals-
based approach. That’s notable given the environment over
the last 18 months.
Larry Dietz of Park Avenue Advisory Services located
in South Bend, IN reports a similar client experience
in that goals-based strategies have helped to manage
client expectations. “Clients realistically know how each
asset should perform relative to their goals,” he said.
“It definitely helps to frame the client’s expectations,
which is a must for a long-term relationship.”
Proof of our approach can be found in advisor response.
More than 1,100 advisors have adopted the goals-based
approach over the last few years. Moreover, the severe
market dislocations of 2008 tested the strategies, which
performed as designed. For example, as of December 31,
2008, four of the five Stability-Focused Strategies have
outperformed the S&P 500 for the one- and three-year
periods and since inception, with consistently lower
standard deviation.4
Goals-Based Investing
What is goals-based investing?
Rather than focusing on just purely investment management,
goals-based investing focuses on a client-centric approach
to wealth management. How can an advisor combine the
traditional methodologies of modern portfolio theory with
what we know about investor behavior?
Foremost, goals-based investing is oriented around the
investor. The efficacy of an investment strategy is not
measured just by traditional yardsticks like market indices,
benchmarks or standard deviation. After all, these are
relative and often have little real-world meaning to the
investor. Goals, however, are very meaningful to clients.
And that’s what distinguishes SEI’s approach from others.
Investment strategies are specifically designed around
client goals. Performance is measured by the client
achieving a stated goal. Risk is a function of failing to
achieve that goal.
More to the point, goals-based investing recognizes that
investors have multiple, often conflicting goals. So rather
than pool all client assets into a single portfolio, we create
a separate portfolio for each goal. Whether the client is
accumulating assets for their retirement, saving for their
children’s education, or building a legacy for their heirs,
there’s an investment strategy specifically tailored to the goal.
Grow assets while managing risk
The Goals-Based Stability-Focused Strategies, for example,
narrow the gap between traditional portfolio theory and
behavioral finance by seeking to grow assets within a
targeted range. The top of the range equals the strategy’s
highest historic value and is adjusted as the fund reaches
new highs. The lower boundary is a fixed percentage below
the ceiling: 10%, 20%, and 30% for the Defensive,
Conservative and Moderate Strategies, respectively. Raising
the lower boundary as the portfolio grows helps to protect
your client’s principal, not just the original investment, and
combats the investor’s tendency to increase his tolerance
for loss as the portfolio grows.
By applying behavioral finance to portfolio construction we
have aligned risk management with the investor perceptions.
These strategies seek to maximize their growth relative to
predefined risk thresholds.3
This enables your investors to
select a strategy consistent with their goals, help reduce
risk and discourage them from making rash decisions with
every market downturn.
PAGE 3
3
Based on SEI’s base case assumptions for asset class returns, risks and correlations there is only about 1% probability of a strategy violating its threshold,
which means it takes into account 99% of all expected outcomes. There is no guarantee that the objectives will be met.
4
Source: SEI (DataMart monthly returns). The performance data quoted represents past performance. Past performance does not guarantee future
results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or
less than their original cost and current performance may be lower or higher than the performance quoted. For performance data current to the most
recent month end, call 1-800-DIAL-SEI.
4. markets and stocks. We know, however, that is not always
the case. Most investors have too little information and are
driven, not by what they know, but what they feel. Rational
decisions are all too often pushed aside by irrational
behavior.
The following page shows a catalog of the more common
behaviors and how our goals-based approach can help
manage them.
Goals-Based Investing
Dealing with investment behavior
A wealth management strategy built around specific goals
offers multiple benefits, not the least of which is its value
in addressing sub-optimal behavior. Bad decision making
is often a function of a lack of information, which is the
major shortcoming of traditional investing. Harry
Markowtiz’s landmark work on “Portfolio Selection” in 1952
led to Modern Portfolio Theory and “efficient portfolios” –
for decades the bible of investment practitioners.5
Many
financial behaviorists have identified what they view as
fundamental flaws in this approach. Building an efficient
portfolio under Modern Portfolio Theory assumes the
investor has perfect information about the economies,
PAGE 4
5
Much of the discussion about investor behavior is from “Explaining Apparent Stock Market Anomalies: Irrational Exuberance or Archetypal Human
Psychology”, Clint Tan Chee Leong, Michael J. Seiler, and Mark Lane, 2002.
Maximum Drawdown measures a portfolio’s peak to trough using monthly returns since inception
of the investment strategy. As a portfolio grows it will continually set new highs and this risk metric
enables an investor to get an estimate of the largest loss a strategy has experienced over its life.
It’s backward looking, so like any statistic it can only provide an estimate of what to expect in the
future since market dynamics can change.
*** Drawdown has been calculated using monthly returns.
Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation.
It is calculated as the square root of variance.
The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal
value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost and current perform-
ance may be lower or higher than the performance quoted. For performance data current to the most recent month end, please call 1-800-DIAL-SEI.
As of 3/31/2009
5. Goals-Based Investing
Herding
The tendency to imitate others, driven by the belief they have
information that justifies their actions. This creates a feeling of
safety in numbers and leads to jumping onto a hot stock. This
causes the stock to initially rise in value, followed by “value
vaporization.”
Overconfidence
Investors tend to overestimate their knowledge and predictive
ability, resulting in excessive, irrational trade volumes or “noise
trading.” Believing they cannot be wrong, investors refuse to
adjust their views in the face of contradicting evidence.
Myopic loss aversion
Investors pay more attention to short-term ups and downs of
the stock market and forget its long-term direction has been
up. As a result, an investor might sell a potentially long-term
winning stock that has under-performed short term.
Hindsight bias and pride
Investors tend to recall their successes but not their failures,
and attribute success to their intelligence, and poor decisions
to bad luck. Success tends to encourage further investing,
especially in a bull market.
Barn door closing
Investors tend to try to reproduce past market success by
buying into a stock whose price has been on an upswing, which
will hurt the irrational investor if the stock price has peaked.
Anchoring
Decision makers tend to form and anchor on strongly held
opinions and are reluctant to revise their views in the face of
new and contradicting information.
Regret aversion
The loss-averse investor tries to manage his risk of regret. He
holds the view that as long as a loser stock is not sold; any loss
is on paper only. As a result, he is reluctant to sell losers and
hopes to see it bounce back.
Nontransivity and question framing
Nontransivity suggests that the order in which investors look
at stocks affects their choices. Additionally, investor response
depends on how a question is presented; framed differently,
the same question would result in different responses from
the same investor.
Over- or under-reaction
Investors tend to overreact or under-react too late to new
information while waiting for confirmation.
Investor Behavior How SEI Goal-Based Investing Can Help
More confident in a goals-based, wealth-management strategy,
the investor is less swayed by public opinion.
Irrational overconfidence is displaced by a clear vision of
where the investor is headed and his strategy for getting there.
Goals-based investing keeps the investor focused on the long-
term. They feel less pain of financial loss knowing they’re on
target for achieving long-term goals.
Committed to a holistic approach to wealth management, the
investor is neither focused on individual decisions, nor engages
in “noise” trading and market timing.
As a rule, goals-based investors are rational investors. They are
not chasing returns and understand success is a function of
meeting goals.
Investor is more willing to let go of bias knowing that, right
or wrong, the important thing is achieving a goal.
Investors are not obsessed with picking winners or losers.
The only “win” is attaining the objective.
“Order” and “framing” are irrelevant. The investor has chosen
a path of wealth management versus investment management.
Investors who zero in on what matters most – achieving goals –
are generally less reactive.
PAGE 5
6. Benefits for the investor
Let’s not forget who most benefits from making solid,
rational decisions – the investor. Committed to a program
of long-term wealth management, focused on achieving
specified goals, the investor will build confidence,
maintain a proper perspective and discipline and remain
focused on the ultimate prize – achieving lifetime goals.
If you’d like to hear more about SEI’s goals-based
investing programs, we invite you to call one of our
Practice Consultants today at 1-888-SEI-ANSWERS
(1-888-734-2679).
Goals-Based Investing
Reaping the benefits
The benefits of goals-based investing may be self-evident
after reading how it promotes more rational behavior.
Nevertheless, it’s worth detailing how our programs will
differentiate you in your market. Nearly all investment
companies are telling the same story the same way:
lumping assets into a single portfolio focusing on
investment performance and then fighting an often losing
battle with counterproductive behavior. Working with SEI,
you’ll look different, sound different and your clients will
behave different.
Beyond differentiation, goals-based investing will help to
deepen the advisor-client relationship, especially during
market upheaval. A 2008 study by British-based Barclays
Wealth showed market volatility increases the likelihood of
a client changing advisors. More than 23 percent of clients
surveyed in the United States said they were more likely
to switch advisors during tough times.6
Ask yourself this:
What’s the likelihood an investor will leave you if he (1)
has reasonable expectations, (2) understands his goals,
and (3) is confident in eventually reaching them?
PAGE 6
About the SEI Advisor Network
The SEI Advisor Network provides financial advisors with turnkey wealth management services through outsourced
investment strategies; administration and technology platforms; and practice management programs. It is through
these services that SEI helps advisors save time, grow revenues, and differentiate themselves in the market.
With a history of financial strength, stability, and transparency, the SEI Advisor Network has been serving the
independent financial advisor market for more than 15 years, has over 6,100 advisors who work with SEI, and more
than $27.6 billion7
in advisors assets under management. The SEI Advisor Network is a strategic business unit of SEI.
1 Freedom Valley Drive, Oaks, PA 19456 -1100
1-888-734-2679
www.seic.com/advisors
6
“Breaking the Mould, a Question of Personality,” Barclays Wealth, 2008.
7
As of 12/31/08
This material represents an assessment of the market environment at a
specific point in time and is not intended to be a forecast of future events,
or a guarantee of future results. This information should not be relied upon by
the reader as research or investment advice.This information is for educational
purposes only.
There are risks involved with investing including possible loss of principal.
There is no guarantee the objectives of the strategies discussed will be met.
Services provided by SEI Investments Distribution Co (SIDCo) and SEI
Investments Management Corp (SIMC). SIDCo and SIMC are wholly owned
subsidiaries of SEI Investments Company.