Bullish advisers, cautious investors
- Advisers are significantly more bullish on stock markets than cautious investors.
- Investor confidence has been affected by economic conditions and geopolitical uncertainty.
- Behavioural coaching can help investors look through negative news to stay invested.
A persistent gap has opened up between adviser and investor confidence
Our latest data reveals that a sizeable and persistent gap has opened up between adviser and investor confidence. While advisers have become increasingly bullish about stock markets, investor confidence remains stuck in the doldrums.
A 77% majority of advisers expect stock markets to go up over 12 months, compared to only 53% of advised clients and 43% of non-advised investors. The gap remains wide on a five-year view: 84% of advisers believe equities will rise versus 66% of advised clients and 61% of non-advised investors.
Percentage who expect equities to rise over 12 months
Percentage who expect equities to rise over 5 years
Using historical survey data, we can see how adviser and investor confidence has changed in recent years. Investor confidence has barely recovered from the 2022 market correction, even though global stock markets bottomed in October 2022 and have subsequently made a strong recovery. Adviser confidence dipped earlier as markets peaked at the start of 2022, then made a significant recovery during the correction and strengthened further as markets bottomed then rallied this year.
The stock market recovery may have taken investors by surprise, given economic conditions have remained incredibly tough and uncertainty has remained high. Higher interest rates, mortgage rates, food and energy prices have continued to put significant pressure on household incomes.
Our survey reveals investors’ inflation expectations have worsened. 62% of advised and 63% of non-advised investors now believe that inflation will remain an ongoing feature for the next few years (up from 47% and 48% previously). This diminished trust in the Bank of England’s ability to get price growth under control combined with political uncertainty and conflict in the Ukraine has all dragged down investor confidence. This, in turn, has been reflected in weaker industry fund flows.
While the reasons behind investor cautiousness are plain to see, advisers don’t seem to be letting economic and geopolitical events affect their investment confidence in the same way. Why is this? Advisers are not blind to the difficulties we face. But they do know that the stock market is a forward-looking mechanism, that bull markets always ‘climb a wall of worry’ in the early stages and that history shows it pays to invest after a market correction.
The importance of investing psychology and behavioural coaching
Stock markets have proven advisers right so far. Investor pessimism would have been damaging to returns if it carried over into portfolio cautiousness. There is some evidence that it did, with 28% of advised clients reporting that they initiated an increase to cash holdings with their adviser.
More significantly, when we asked investors about the mistakes they made over the last 12 months, the biggest was ‘taking too little risk’ for advised investors (34%; up from 23% previously). This was also the second greatest mistake for non-advised investors (28%; up from 25% previously). Perhaps, the uptick in these numbers since our last survey shows that investors do recognise they were a little too defensive as markets have recovered despite the economic odds.
What mistakes, if any, do you feel you have made with your investments over the last 12 months?
There is little doubt that geopolitical uncertainty and gloomy economic news affects investors. A remarkable 72% of advised investors reported that they contacted their adviser to discuss market volatility in the last 12 months; a notable jump from 61% previously. Non-advised investors believe that being too influenced by news and markets was their biggest investing mistake.
Are you aware of the various emotional biases that can affect your investment decisions?
How much do you think emotional decisions have cost you in terms of forgone return in the past 12 months?
Most advisers are acutely aware of these issues and the need to coach investors through volatile times. The field of behavioural finance has greatly expanded in recent years as has the use of behavioural investing tools. 9 out of 10 (89%) advisers say they are aware of the behavioural biases that can affect their clients, while 66% use behavioural profiling or tools to segment their clients by their financial personality.
This ability of advisers to provide behavioural coaching seems to be flowing through to client understanding in a number of ways. First, advised clients have been consistently more bullish than non-advised investors. Second, a 57% majority of advised investors say they are aware of emotional biases, compared to only 39% of non-advised investors. Third, 59% of advised clients believe that market declines can be a good time to buy, compared to only 47% of non-advised clients. Lastly, and most significantly, 71% of advised investors believe that their adviser helps them to avoid the emotions associated with investing; this is up from 64% in our last survey.
In our last survey, we revealed that 95% of advisers believe that emotional decisions cost their clients at least 2% pa in forgone returns. This time we asked investors the same question. 62% of advised investors believe emotional decisions cost them between 1 and 4% per year. The non-advised numbers show a similar pattern, but interestingly, with higher proportions believing that they have been completely unaffected (0% or not applicable).
These results show there is still considerable scope for behavioural coaching and tools to add more value to advised relationships. A deeper appreciation of ‘adviser alpha’ – the value advisers can add on the investing journey – could also be useful for engaging and converting non-advised investors.
Analysis
...benefits of behavioural coaching are clear...
It’s understandable investor confidence has taken a knock given the current economic and geopolitical uncertainties, but stock markets typically look through the gloom, so it can be damaging in the long run to take portfolio risk off the table due to short-term, negative news.
With investors admitting that ‘taking too little risk’ has been one of their biggest mistakes, a key part of the adviser role is to keep their clients on track from a risk-reward perspective, by focusing on the long-term outcome rather than the inevitable ups and down of the investment journey.
The benefits of behavioural coaching to advised clients are clear in these results. Advised investment confidence has held up better than non-advised, advised clients are more aware of emotional biases and they are also more likely to take advantage of the more reasonable stock valuations that market corrections create.
