The real significance of the number “93.6%” for financial planners

Asset allocation – the key determinant of investment returns?

Rob Macdonald, Head of Strategic Advisory Services, Fundhouse

In 1986 Brinson, Hood and Beebower (BHB) shook the financial advice and investment industries to their roots with its finding that a portfolio’s asset allocation had the greatest impact on the variability of returns of a portfolio. BHB studied the performance of 91 large US pension plans over the 1974-1983 period and concluded that “investment policy dominates investment strategy (market timing and security selection), explaining an average 93.6% of the variation in total plan returns”. Suddenly the notion of a great “stock pick” was questioned. If true, all the talking heads on Bloomberg TV and CNBC would have less to talk about. After all, does it really matter what happened to Apple’s share price yesterday when all you should worry about is whether you have an appropriate exposure to equities?

The controversial nature of the findings of the BHB research led to Brinson, Singer and Beebower (BSB) redoing the study in 1991 to test the veracity of their initial findings. With the wisdom of hindsight, we may not be surprised that the 1991 study reaffirmed the 1986 study, although this time the number was down to 91%. Still a hefty indicator of what’s important when putting a client’s investment portfolio together. This did not appease critics of the 93.6% thesis. In 1997, William W Jahnke wrote what the Journal of Financial Planning described on the 25th anniversary of the publication as “without question, the most controversial article ever to appear in the journal”.

In the article entitled, “The Asset Allocation Hoax”, Jahnke raised concerns that the BHB study focused only on the variability of returns, and measured quarterly returns, rather than focusing on full-term actual returns. He also raised other methodological issues, such as the sample was only institutional investors and they measured variability rather than standard deviation and did not take costs into account. But arguably his biggest gripe was that the study undermined the value of tactical asset allocation and implied a fixed asset allocation would see investors through to their goals.

Despite Jahnke’s concerns, he concludes his article by saying: “There is little doubt that asset allocation is an important determinant of portfolio performance. However, such agreement does not settle the issue of how to do it. What are the appropriate asset classes? Should asset class weights be fixed or dynamic? How should asset allocation be determined? What about the cost of implementation?” Some might say his response is a storm in a teacup because these are obviously key questions to consider when putting client portfolios together. The more important question to consider for financial planners, is what is the real significance of the 93.6% thesis? The answer to this question may not be what you think, but first a little more context.

Investment returns – more dependent on investor behaviour?

Since 1984, independent investment research firm Dalbar Inc. has published its annual Quantitative Analysis of Investor Behaviour report, which studies the returns that investors get versus the returns of their investments. The study consistently finds investor returns are materially lower than their investments. The gap between the two is often referred to as the investor “behaviour penalty” which according to the 2022 Dalbar study, was 3.5% per annum over the last 30 years. In the short term, the gap can be higher, as in 2021 when the number was closer to 10%. No surprise given the uncertainty and stress that many clients experienced during the Covid pandemic.

The 2022 edition of the Dalbar report concludes that investment results are more dependent on investor behaviour than fund performance. This is not a new conclusion. The 2015 report made the same point and observed that this is the case “no matter what the state of the mutual fund industry, boom or bust”. It went on to note that: “After decades of analysing investor behaviour in good times and in bad times and after enormous efforts by thousands of industry experts to educate millions of investors… imprudent action continues to be widespread.”

Investor education – what stops it from working?

This begs the question, why does behaviour not improve with financial education? One reason behaviour doesn’t improve is because the focus of the education is so often on the investments, not on the investor. Unfortunately, learning about how an equity is valued or what a unit trust is, or telling us that we should buy low and sell high doesn’t influence behaviour. It assumes that as human beings we make decisions with our heads. That we are cognitive and rational beings. This is not the case. We do have cognitive influences on our decision-making, but not always in the way that one would expect. Daniel Kahneman highlights in his book Thinking Fast and Slow that even cognitive-based decisions can be flawed. We also have emotional influences on our decision-making; the impact of greed and fear on investor behaviour is well documented. The cognitive and emotional mistakes we make are compounded by the fact that we are social beings, and as a result are unduly influenced by those around us. Hence, the widespread phenomenon of herding in investment markets.

The industry has spent a vast amount of money and time trying to educate clients both locally and globally; we now have insights into human behaviour to the extent that we can discern the minutiae between the hundreds of cognitive, emotional and social biases we all fall foul of. In addition, two Nobel Prizes for Economics have been awarded in the first 20 years of the 21st century for the advanced work done by specialists in Behavioural Economics. Despite all this, the Dalbar study repeatedly shows how investors make the same mistakes repeatedly, and in so doing, undermine their long-term financial outcomes.

Investor behaviour – what does influence it?

Given the multiple influences on our behaviour when it comes to investments, simply being educated about investments, and asking us to behave well doesn’t work. The key is to find ways to influence the person and their relationship with their investments. A classic behavioural example of what it means to not rely on education to shift behaviour, but to focus on the relationship a person has with a problem was highlighted by the story of Schiphol Airport in Amsterdam and its attempts to solve the problem of too much spillage at the urinals in the men’s toilets. Initially, attempts were made to solve this problem through the display of posters requesting users of the urinals to be aware of the problem, asking them not to perpetuate it, given the health risks it posed. These attempts at education failed. Cognitively the users of the toilets understood the problem, but this understanding did not lead to a behaviour shift. The problem was eventually solved when a real-life image of a fly was painted onto each urinal bowl. The men now had a target to aim at which nudged their behaviour into the right direction. The spillage problem was solved virtually overnight. The men did not have to think about the education they had received about the problem, they had been nudged into an instinctive action which solved the problem.

Some biases which may seem negative, can have positive influences.

In a sense the investment industry has faced the Schiphol problem for some time. It has tried to use education without great success but has also used nudges that have proven more effective. One of the most effective nudges that is used to influence investor behaviour is automatic contributions to a savings or investment vehicle, like a retirement fund. Investors don’t have to consciously think about investing, or consider the merits of doing it, it happens automatically once they are enrolled in such a savings or investment programme.

This brings us back to asset allocation. A client’s strategic asset allocation is a nudge. It’s the fly in the client’s investment strategy if you will. But nudges are not failsafe. In the past I have worked with colleagues who resigned to enable them to access a portion of their company retirement fund savings. Human beings are resourceful. They will find ways to do things even if they are not in their own best interests. So, it’s not always easy to implement a nudge with clients. Sometimes you must accept that they will be at the vagaries of the cognitive, emotional and social forces at play which impact their financial and investment decision-making. The reality is that there are literally hundreds of human biases that emerge from these forces, and they don’t only influence our decision-making around money, but in all spheres of life.

As a result, we have seen a proliferation of tools and techniques to help financial planners identify client biases and counteract them in some way. There may be some merit to this but given the number of biases we can fall foul of it is risky to think that you as a financial planner will be able to analyse whatever biases clients present to you and find ways to shift their behaviour through this knowledge. It is also important to say that some biases which may seem negative can have positive influences. For example, the status quo bias explains why human beings struggle so much with change because we tend to prefer to keep things the way they are. This bias has a positive spinoff, as it enables automatic enrolment in savings plans to work, because once enrolled, thanks to the status quo bias, we stay enrolled.

The 93.6% thesis – how can it help us solve the problem of investor behaviour?

Behavourial economist Meir Statman commented on the BHB findings by saying, “Good strategic asset allocation is like tailoring a well-fitting suit. Good tactical asset allocation and security selection is like weaving the suit’s fabric at a low cost. Both are important but they are distinct. High-quality fabric woven at a low cost provides little comfort when it drapes a size 40 body in a size 46 suit.”

If you have ever had a suit or any outfit made, you will know that after the initial measurements, style and fabric selection, a few more visits to the tailor are likely before you are happy with the fit. Seldom does an off-the-shelf suit fit without alteration, and even one made from bespoke measurements requires the same.

During my one and only experience of this process, I was not interested in how the alterations were being made, what stitches or cuts were being done, I just wanted a suit that was comfortable to wear. When we were doing the fitting, the tailor’s focus was always on me, getting me to look into the mirror as well as repeatedly asking me how the suit fit “feels”. Statman observes from the BHB research that, “Financial advisors are tailors more than they are weavers; they are investor managers more than they are investment managers.”

If a financial planner is a client’s tailor, then the strategic asset allocation and by extension the client’s full financial plan needs to fit not only the client’s wallet but their life as well. Holding up a mirror for a client and helping them determine how they feel about the fit of their life and money is, as Statman says, the work of the investor manager. The skillset of such a professional is different from, and dare I say, far more complicated than the work of the investment manager. Cutting, trimming and sewing an inanimate object is far easier than trying to help someone make decisions who can’t simply look into the mirror and know the answer, but still has to deal with the cognitive, emotional and social influences that come with being human.

The challenge, Statman points out, is that “investors see more value in weaving than in tailoring. They are more willing to pay for investment management, with its focus on beating the market, than for investor management, with its focus on the examination of financial resources and goals, diagnosis of deficiencies, and financial education and care.” A challenge that many financial planners face is themselves believing in the value of investor management. To this end, I think Statman’s analogy of the tailor and weaver does not do justice to the complexity and value of the role of the financial planner.

Being an investor manager – what does it involve?

The tailor role mirrors the non-negotiable technical role that every financial planner must play. Nobody wants to visit a doctor who is not clinically qualified. But in addition to the mantle of the tailor, I believe the financial planner plays three critical roles. As a client’s thinking partner, you help them to decide what outfit they actually want or need. The client may arrive thinking they need a suit but after working with you as their thinking partner they may realise they need a shirt and a pair of trousers instead.

The second role of the financial planner is as choice architect, helping the client decide what type of shirt, what type of trousers? And once that decision is made, the outfit can be tailored and fitted. But it is in this process that the financial planner plays the third role of behavioural coach, ensuring that once the client agrees that the outfit fits, that they continue to wear it and don’t discard it without good cause.

The third role ensures that clients don’t change their suits for the wrong reason. The suit might not feel like it fits as well because the client has put on weight, not because there is a problem with the suit, which may be what the client thinks. Here the work of the financial planner is far more challenging, as to appease a client it would be much easier to just change their suit. But this would not be fulfilling one’s duties as an investor manager and would not be helping us to break the pattern of behaviour that the Dalbar research consistently reveals. Vanguard estimates behavourial coaching is worth 1.5% pa of alpha to a client’s portfolio. Arguably the value-add of behavioural coaching is wherever the Dalbar investor “behaviour penalty” sits; currently the long-term average is at 3.5% pa.

Acting as a client’s thinking partner, choice architect and behavioural coach, and developing the skills to play these roles effectively, I believe gives financial planners the best chance of fulfilling the 93.6% mandate, which is to be an effective investor manager. Tailors just want their clients to look good, sometimes for just one occasion. Financial planners have a far more important and far more difficult role to perform; their clients need outfits that fit them for life.

After 25 years in the investment industry, Don Phillips, director of fund research at Morningstar, said the number one lesson he had learned was that the “finance business” is not about “money management” but rather “behaviour modification”. It’s no surprise then, that Meir Statman suggests the real significance of the BHB research is that it clarifies for us that 93.6% of financial planning is about the behavioural management of clients.


Brinson, Gary, Hood, Randolph and Beebower, Gilbert; “The Determinants of Portfolio Performance”; Financial Analysts Journal, July-August 1986, pp. 39-44.
Brinson, Gary, Singer, Brian and Beebower, Gilbert; “The Determinants of Portfolio Performance II: An Update”; Financial Analysts Journal, 47, 3 (1991), pp. 40-48.
Dalbar’s 21st Annual Quantitative Analysis of Investor Behaviour 2015 Advisor Edition.
Dalbar’s 28th Annual Quantitative Analysis of Investor Behaviour 2022 Report.
Don Phillips, Reflections on Fund Management: “Five Lessons from 25 Years”, Presentation at the Business & Wealth Management Forum, Chicago, 15 October 2011.
Jahnke, William; “The Asset Allocation Hoax”; Journal of Financial Planning, February 1997, pp. 109-113.
Statman, Meir; “The 93.6% Question of Financial Advisors”; The Journal of Investing, 2000 pp. 16-20. 

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