Morningstar flags rise in ‘disconnected expectations’

The report – What investors think, what advisors think, and how everyone can get on the same page – suggests that investors have “internalised the industry’s past tendency to over-emphasise returns and benchmark relative performance” and don’t necessarily appreciate the interpersonal side of advice.

“Even though personalisation or behavioural coaching may result in more overall wealth, our research suggests that investors do not see their value,” Morningstar wrote in the report.

“This shouldn’t surprise anyone. For years, professional financial advice was promoted as a way to beat the market, and while financial and investing professionals might understand that this isn’t the case, changing the ‘returns first’ perception won’t happen overnight.”

The research asked 693 investors and 161 advisers to rank a series of common attributes in order of importance. While both advisers and investors ranked “helps me reach my financial goals” in their top three most valuable attributes, their priorities quickly split. Advisers placed “helps me stay in control of my emotions” as one of their most valuable services, but investors ranked it dead last.

“Research suggests that cognitive biases and other behavioural obstacles often inhibit investors from making sound financial decisions, especially when their emotions are running high,” Morningstar wrote.

“Behavioural coaching is one solution for common behavioural mistakes (such as panic selling in a market downturn) but it was all but ignored by the investors who took our survey. Given the numerous research findings suggesting that behavioural coaching is the single most impactful service an adviser can offer, there’s obviously an opportunity for communication and education here.”

Morningstar believes that advisers should take a goals-based approach, explaining the trade-off inherent in maximising returns – specifically the possibility of added risk that could prevent clients from reaching their financial goals – to better communicate their value.

“Research shows that the interpersonal side of advice, which includes personalisation and behavioural coaching, can be the most valuable aspect of professional advice, and the industry needs to better articulate that,” Morningstar wrote.

“Returns aren’t the end-all, be-all – modern advice is more coaching than stock-picking, and the short-term returns are only part of the picture.”