The value of behaviourally powered investment advice

Paul Nixon, Head of Behavioural Finance at Momentum Investments, takes an in-depth look at investment decision-making from a behavioural perspective, based on the most recent statistics and studies.


One of the few positives that have emerged from the COVID-19 global pandemic has been the remarkable increase in savings rates around the globe. We’re not stopping at a Starbucks en route to work anymore for coffee or grabbing lunch at the canteen, and of course, our cars have spent more time in the garage than on the road.

We’ve moved from FOMO (fear of missing out) to JOMO (joy of missing out) to HOGO (hassle of going out) and we’re saving as a result. South Africa’s savings rate escalated by nearly 22% from levels of less than 15% of gross domestic product (GDP) in 2019 to more than 18% in June 2021[1]. Canada had pre-COVID savings levels as a proportion of GDP that were comfortably under 15% in 2019 that have escalated sharply to over 27% in 2021 (an 85% increase)[2].

Somewhat concerningly, however, is that this increase in savings appears to be accompanied by an increased level of engagement with people’s investments. New research from revealed in 2021 that about 1 in 10, or three million younger Canadians (millennials and Gen Z) plan to start managing their own investments and ditch their financial adviser. A further 4.7 million Canadians are seriously considering taking an active role managing their future investments without the aid of a financial adviser[3].

The two primary reasons being related to fees and having more ‘control’ over their money. From a behaviour tax perspective more control is certainly less than ideal. In 2021 South Africans also tampered a lot with their investments. Our research* shows that the number of ‘switchers’ increased by 80% on the Momentum Wealth platform, incurring an average behaviour tax of 3.5% of portfolio value for their troubles.

The value of financial advice is well documented. Another 2019 study from Canada showed that advised households accumulate 290% or nearly three times the amount of assets over a 15-year period when compared to non-advised households[4]. Russell Investments in the United States also recently released a study in 2021 concluding that the behavioural coaching part of advice alone is worth 2,02% per year to investors[5].

Paul Nixon, Head of Behavioural Finance at Momentum Investments

A good financial adviser earns far more for their clients in excess of their annual advice fees, so why isn’t everyone queueing for great financial advice?

There are likely two primary behavioural biases at play that may impact on investor’s decisions to use a financial adviser.

The first is undoubtedly overconfidence. With the amount of and access to information these days it creates the illusion of a more stable and predictable world. ‘Expert’ opinions are seemingly easier to come by and any view is easily supported by any number of sources online. When coupled with selectively attributing positive outcomes to skillful decision-making and poor outcomes simply to bad luck, it creates the illusion that investing decisions are much easier than they are in reality.

At the opposite end of the spectrum is loss aversion. Statman (2019) refers to a global survey of the number one thing that people want from their investments. Unsurprisingly, they want financial security. People are terrified of losses and being more engaged with their investments gives us a greater sense of control as well. The question is: how can behavioural insights be used to get investors back to using financial advisers who utilised behavioural coaching for better client investment outcomes?

In a first-of-a-kind study by the BEworks Research Institute in 2021, 2 991 North American consumers aged 25-75 with at least $50 000 in financial assets were asked to take part in an online simulated investment decision-making exercise.

The key findings of the study were:
  1. Behaviourally-informed or powered advice groups were significantly more likely to actually follow the advice received compared to respondents who received conventional advice. Specifically, participants who received behaviourally-informed advice were around twice as likely to follow the recommendations of the adviser exactly.
  2. Behaviourally-informed styles of delivering advice led the participants to select significantly more diverse portfolios compared to the conventional advice group. This diversification effect is reflected both in participants’ tendency to choose a greater number of funds to invest in as well as the selection of more diverse fund types.
  3. Unsurprisingly, it was found that behavioural biases influence financial decisions. On average, investors reported to saving around 2% less of their income than they set out to (intention-action gap). Individuals with higher levels of subjective knowledge (how they rated their knowledge versus actual qualifications) also all allocated far more to risky asset classes, confirming overconfidence of this group.

As we enter 2022, Momentum Investments will be shifting gears to accelerate making both financial advice and investing even more personal. Using unsupervised machine learning techniques has shone some light on behavioural patterns of South African investors and in 2022 we’ll be launching a South African-first Financial Personality Profiler to understand how personality traits effect our investment decisions.

Understanding investors and using behavioural insights to elevate the perception of value in financial advice will help in keeping clients invested and help you help your clients to achieve their personal investment goals.

*Covid-19 Investor Behaviour: Was 2020 that different after all? | April 2021

[4] Claude Montmarquette & Nathalie Viennot-Briot, 2019. “The Gamma Factors and the Value of Financial Advice,” Annals of Economics and Finance.

Momentum Wealth (Pty) Ltd (FSP 657) is an authorised financial services provider. Momentum Investments is part of Momentum Metropolitan Life Limited, an authorised financial services and registered credit provider (FSP 6406).