Consumers’ Level of Investment Experience May Not Be What You Think

Whether consumers feel experienced is somewhat correlated to their level of investible assets, but not as strongly as one might assume, according to new research.

In “Experience Divide: How Beliefs and Truths About Investing Experience Affect Loyalty and Attitudes to Active-Passive, HSAs, and Descriptions of Advice,” Hearts & Wallets found that 28% of households with between $500,000 and $2 million in assets consider themselves inexperienced investors.

Overall, consumers who say they are very inexperienced represent about 40% of the market. And while one would assume that perceived experience is greater for older, wealthier consumers, about one third consider themselves inexperienced investors, according to the findings.

With that in mind, Hearts & Wallets has found that understanding the degree of perceived investing experience and how it influences consumer attitudes to active management, advice-seeking and firm loyalty can help determine targeted strategies for communicating with investors.

The research, which focuses on consumers ages 53 to 70 with $500,000 to $5 million in investable assets, divides the market into three groups based on perceived investing experience:

  • Inexperienced – 1.9 million households, $1.9 trillion investible assets
  • Middle – 1.2 million households, $1.8 trillion investible assets
  • Experienced – 3.3 million households, $5.9 trillion investible assets

Misconceptions and Truths

Perhaps not surprisingly, less experienced investors see investing as “scary,” and believe that being experienced means constantly watching and acting on the market, having detailed product knowledge and even possessing a formal education in finance, the authors note.

As a result, inexperienced consumers are more apt to seek a safe haven, and likely are passive, waiting to be told what constitutes a higher value-added service, the report explains. By contrast, experienced consumers say experience is about knowing when to seek help, being able to evaluate that help and calmly taking educated risks.

“For inexperienced consumers who do want to learn more, debunking myths about what experienced consumers really do can help them to understand why experienced investors are open to higher-value added products and services,” explains Laura Varas, CEO and founder of Hearts & Wallets.

Experience and Active Management

In an earlier report, Active vs. Passive and Impact Investing, Hearts & Wallets found that investors who say they are more experienced are more likely to believe active management can add value beyond indexing.

The current report found that investors of all assets levels who describe themselves as “very experienced” are more than twice as likely as investors of all experience levels who have more than $2 million to agree that “it is possible to reduce and/or limit downside negative returns to less than what the broad market or an index incurs” through active management.

Firm Versus Advisor Loyalty  

With loyalty, Hearts & Wallets finds that experience does play a role in the level of consumer loyalty to advisors versus firms. According to the findings, loyalty is generally higher to advisors than firms because people can personalize messaging. The report suggests, however, that there are opportunities for firms to enhance loyalty by personalizing messaging through technology and articulating how home offices add value, such as through stability, training and reputation.

Yet, despite their perceived loyalty, inexperienced and middle investors indicated they would look elsewhere with promises of higher returns, while experienced investors cite doubts about trust as a reason to look elsewhere.

Simplifying the Complex

A concept test examining how to simplify complex communications looked at a Hybrid Active and Passive Fund positioned for individuals in or near retirement who still want to grow their portfolio without aggressive risk. According to the findings, the concept was attractive in theory to many participants, but they had questions about how it would work. The test revealed potential opportunities for products with a combination of active management and passive indexing.

Meanwhile, a concept test about how to communicate fund change, Change in Mutual Funds Available, identified sensitivities about incentives, trust, pricing and the tension between home offices and the field.

“The delay of the DOL fiduciary rule has created extensive misunderstanding, especially among inexperienced and middle investors,” Varas emphasizes. “Firms must recognize this confusion in their communications and explain how it is possible to put client interests without being a fiduciary.”

HSAs and Funding Education

Industry concept tests that focused on addressing rising health care costs in retirement and funding education showed high consumer receptivity. For Investment Account for Future Health Care Expenses, i.e., a health savings account (HSA), respondents expressed high interest and inquired about the triple tax benefits, investment options, rollover ability and portability.

Overall, the research found that HSAs had low awareness with this age group, who felt they might be too late to benefit. Education funding for grandchildren was praised as a vehicle to address an unmet need for ways to help families, but concerns were raised about how such fund would operate.

The research is based on three national focus groups conducted in last fall in New York City, St. Louis and San Francisco, with consumers ages 53 to 70 who have sole or shared decision-making responsibility for investment decisions and $500,000 or more in investible assets, excluding real estate.

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