In the latest Winter Issue of our quarterly magazine Confidant, David Stevenson (columnist, active investor and creator of the adventurousinvestor.com blogsite) looks at what he believes investors want from a wealth manager and asks whether digital investing platforms can deliver it.
What do investors really value?
On paper, the digital revolution sweeping through banking and wealth management looks seductive: build a great customer interface with funky financial tools, integrate it into a snappy brand name, stuff the underlying portfolios full of cheap exchange-traded funds (ETFs), and hey presto – you have a cheap digital wealth solution. What’s not to like? A lot as it happens. These Fin-tech disruptors are making the same mistakes as we financial journalists and many fund managers – they are assuming too much interest. Seamless technology and wonderful tools are fine per se but I think their average customer has a very different set of priorities and motivations.
My hierarchy of investing needs
Let’s start with what a typical customer wants. Whether we are talking about an investment management account or a robo-service, this can be distilled down to a set of wants, needs and fears. As psychologist, Abraham Maslow, famously noted, there is a pyramid of human needs that starts with physiological requirements such as food and water and then moves up to safety (we are a collective species), before hitting the higher-order needs such as belonging and then esteem. At the very top is self-actualisation, or personal fulfilment.
In the graphic below, I map out my own take on this hierarchy but built around investment needs. This is based on decades of talking to investors.
In my experience what investors really care about, above all, is the base need of investment – returns, known as capital gains in tax-speak or, more broadly, wealth creation. This requires an understanding that investment is an entirely different activity from saving and that without risk you cannot get returns.
Curiously, because the vast majority of robo-based platforms are infatuated with lowering costs, they’ve almost completely forsaken the idea of “alpha” (the possibility of earning market-beating returns) and the importance of capital gains and wealth creation. They rely almost entirely on simple tools which show what might happen if I save at £xxx per month at a growth rate of y% a year. In isolation, the vast majority of investors regard this as rather unhelpful – I find that they care far more about an investment track record and a proven ability to give clients a superior return.
Cue the next level of needs – protection. Many savers and investors are driven by the conflicting emotions of greed (“give me above-average returns”) and risk aversion (“don’t lose my capital doing it”). That’s why there are so few genuinely long-term UK investors out there – most people hate the idea of risking their hard-earned capital. They see volatility as risk (where I see reward for patience) and are prone to immediacy bias – obsessing about seismic short-term events and overlooking the many, long, boring periods of steady growth in between.
Your worst enemy is you
Our inability to grasp and manage long time-spans costs us dearly. Even those sensible investors who have managed to accumulate capital by, say, their mid-40s, then start dialling down risk because they believe they’ll need the cash in their mid-50s. For many, the hard truth is they won’t be dialling down work until closer to 70, so their window for capital growth has been artificially shortened. I think this idea that life is made up of short windows of opportunity holds true for most generations, including the millennials – “I can’t afford to invest because I need to save for a house”. The reality is that we all have increasingly long time spans ahead of us which, in turn, means we can absorb more risk than we realise and indeed need to.
So although advisers may spend time explaining the wonders of compounding growth over long time periods, a great many investors suffer from a behavioural quirk that stops them appreciating its potential – since they cannot plan beyond five or ten years, compounding seems boring and pointless. Say goodbye to one of the key building blocks of modern investing.
A human shoulder to cry on
As we move up my pyramid of needs we run into another challenge – our human need to talk to someone when problems emerge. In my experience, every time there’s a sudden spike in market volatility, investors get on email and pick up their phones. Woe betide, therefore, the platform or product that is not ready for a stock market crash when a purely digital solution will suddenly seem a poor companion and guide.
Near the top of my pyramid is brand – clients love established, trusted names, especially ones that their friends use. Only at the very summit, do we get to technology-based stuff such as user experience (UX) and by then it’s more of a nice-to-have than a necessity.
What my pyramid of financial needs suggests, therefore, is that the next generation of disruptors will need to rewire their business models. If they don’t, they’ll lose out to the more established firms who understand this psychology of needs and fears intuitively.