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5 strategies to overcome the tyranny of investment choice

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Ben GossPublished: 06 October 2016

In a famous experiment in an upscale Californian grocery store, researchers set up a sampling table with a display of delectable jams. On the first Saturday they offered an array of 24 different jams to taste, on the next Saturday they displayed only six.

More shoppers stopped at the display when there were 24 jams. But when it came to buying jam, 30% of those who stopped at the six-jam table went on to purchase, as opposed to only 3% of those who were faced with the selection of 24.

Too much choice, concluded Sheena Lyengar of Columbia University and Mark Lepper of Stanford, is demotivating.

Others studies have found similar results in 401(k) retirement plans. These plans offer huge incentives to participate, including tax breaks and employer contributions. At the same time, they typically present a huge amount of choice. The researchers observed: with just two choices, 75% participated, but with 69 choices, only 60% participated.

This phenomenon is known as the "tyranny of choice."

With over 2,000 investment funds available for sale in the UK whole of market investment selection is not for the faint hearted; for advice firms, or for consumers.

How to shortlist investment options

Most firms select shortlists (or in the old world ‘panels’) reviewing these regularly against a set of pre agreed criteria. Increasingly this work is done by third party ratings agencies including ourselves.

The difficulty however is deciding on the criteria against which investments should be rated and ultimately selected. Whether an investment is likely to ‘perform well’ is not in itself the most important question to be answered. The key question is whether an investment is likely to deliver against the client’s aims and objectives and specifically within a reasonable range for the level of risk they are willing and able to take. Is the investment suitable?

The retail investment world is beginning to address this challenge and doing so increasingly rapidly. In fact Roubini Thoughtlab a US analysis and research firm recently published a report entitled Wealth and Asset Management 2021: Preparing for Transformative Change. The firm argues that complexity of product offer was one ofthe big things holding back digitisation in major financial services firms and one that would need to change.

Reduce complexity and the number of options

Here are 5 strategies being adopted across the industry to address this complexity and slim down the range of solutions on offer:

  1. Robo. Automated advisers in the US almost all provide as their solution low cost, risk targeted, multi asset investments, be they portfolios, funds or increasingly ETFs. UK firms are adopting a similar strategy.
  2. Guidance. Some of the most successful digital guidance services help customers understand the level of risk that may be right for them before presenting a small range of funds or portfolios which meet that risk target.
  3. Multi asset. It’s not just the D2C world that is moving in this direction; the rapid success of fund offerings from companies such as BMO, Canada Life, Santander and Premier in the risk managed, multi asset space for IFAs shows that advisers are adopting this approach too. Firms such as L&G are leading the way with low cost passive solutions.
  4. Intermediary firms’ offers increasingly follow the same pattern; the Lighthouse Luceo funds being the latest example of risk targeted solution based funds designed to reduce choice to a manageable level and ensure suitable outcomes.
  5. Private client wealth managers having offered risk targeted discretionary portfolio services for decades. Many managers are now simplifying their offer around a series of model portfolios targeted against specific risk levels and outcomes; income, growth or wealth preservation etc.

Nudge techniques suggest that you can help your clients make better choices by making better choices easier (e.g. putting fruit near the checkout rather than sweets and cakes). This is one of the most effective things advisers as a choice architect can do.

Reduce cognitive load

If you have helped your customer understand a suitable level of savings or withdrawals and the level of risk that is right for them, providing them with a smaller selection of good choices; risk targeted funds or model portfolios for example makes their logical choice easier. Operating long shortlists or building advisory or, except for the very highest net worth clients, discretionary portfolios for each client is not only an increasingly complex, expensive and risky thing to do, it puts too many varieties of jam on the shelf and makes the client’s job harder. If you are using a digital service to do this, the user experience experts would call this 'reducing cognitive load' i.e. the amount of thinking the client has to do!

No longer performance for performance's sake

None of this relies on emphasising performance numbers in isolation or alpha versus unrelated benchmarks, all focus on helping your customer select and compare a manageable number of options which help ensure suitability for them and for you.

Let us know if we can help

Dynamic Planner helps financial advisers and institutions accurately assess the risk that individuals are willing and able to take and accurately assess the risk that investments represent. We do this through our core service and through API driven tools. Increasingly we work with asset managers to target investment offerings to help ensure ongoing suitability and provide research services to rate investments in the context of our tried and tested asset and risk model. Please do get in touch if you would like to know how we can help your firm.  

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