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Practice Management > Building Your Business > Prospect Clients

Investors Have Too Much Information, Not Enough Knowledge: Morningstar

By Michael S. Fischer

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What You Need to Know

  • A quarter of respondents in a new Morningstar survey said they feel very or extremely uncomfortable making investment decisions.
  • This presents opportunities for financial advisors, but the survey also found that advisors have a PR problem.
  • As such, advisors must clearly differentiate themselves from other sources of financial information, Morningstar says.

Investors today have access to data and research that used to be available only to financial professionals, and are bombarded with advice from both traditional sources and social media. Yet they are uncertain about what information can be trusted, what is valuable and what is simply noise.

On top of that, they can choose from up to 750,000 different investment options, and even more if they’re accredited.

In a new survey, Morningstar asked about 2,000 investors across the U.S. how they felt about this plethora of information. Ninety-five percent of survey participants are involved in their household’s investment decisions, and those who are actively investing have been doing so for an average of 15 years.

Twenty-six percent of respondents said they feel very or extremely uncomfortable making investment decisions. The main reason? Sixty-five percent feel they do not have enough knowledge to make the right decisions.

Among respondents who are uncomfortable making investment decisions, 42% reported that they have the largest part of their investable assets in cash or liquid accounts even though they could benefit from investing.

Opportunities for Advisors

Financial advisors have clear opportunities to help sort through the noise. But the Morningstar survey found that advisors have a public relations problem.

When respondents were asked to rate how valuable different information sources are to them, they assigned similar value to financial advisors as to trading and investment platforms and to financial news sites. However, advisors’ value increases significantly in investors’ eyes once a relationship begins.

Fifty-three percent of clients in an advisory relationship tend to rely on providers for help with asset allocation, 51% in addressing changes in economic conditions, 31% with taxes and 28% for help with life events. Morningstar said this suggests that although advisors may have a perception problem with investors, that improves after the relationship begins when they help clients in concrete ways.

To get to that point, Morningstar said, advisors should have an accessible summary of the services they offer, how they can help different clients based on their current and desired state, and how they are compensated for their services.

Thirty-six percent of respondents said they had not engaged an advisor because of cost. If cost-consciousness is the highest barrier to onboarding a client, advisors must clearly differentiate themselves from other sources of information, Morningstar said. They should position themselves in the role of educator but also be transparent about how the investor pays for advice services (commission, fee based or subscription based).

Advisors Can Add Value

Survey participants listed three main factors they consider when thinking about their best investment strategy:

  • Maximizing returns and minimizing losses on all investments: 34%
  • Finding the best financial advisor to meet unique investing needs: 27%
  • Security of assets with the lowest amount of risk: 23%

According to Morningstar, these considerations collectively suggest that risk management is critical to investors. For many, personalization may equate to finding an advisor who is able to help them identify their risk tolerance and act accordingly.

Among participants who work with an advisor, 38% reported a strong understanding of risk management, while only 21% of those who do not with an advisor said they have a strong understanding.

The survey also showed that most investors look to adjust their investments when the market fluctuates, and those who work with an advisor are more likely to adjust their portfolios, finding valuable reallocation opportunities. Morningstar said advisors can differentiate themselves from other information sources by providing personalized advice when markets significantly affect the investment landscape.

According to the survey findings, participants gravitate toward traditional investments over emerging asset classes, likely in part because of a perceived lack of access.

Fifty-nine percent said they do not believe they can easily invest in newer asset classes, and 75% said they lack a good understanding of them. However, those who are already investing in emerging asset classes — and specifically cryptocurrency — are likelier to be working with an advisor than those who do not invest in crypto.

Morningstar said this suggests that this advisors have an opportunity to engage with a group who may be interested in different asset classes but who still want professional guidance on their allocations and overall investments. It also underscores a need for advisors to stay relevant by staying informed about emerging asset classes to create robust investment plans that account for an expanding portfolio.

(Image: Adobe Stock)

Michael S. Fischer

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