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The Benefits of Customer Goals for Investment Advice

© Joachim Löning

After many years of steady growth, the current investment environment has become more volatile. Many investors are seeing declines in their portfolios and are asking themselves whether they should sell, invest more or do nothing. The role of investment objectives to answer the question will be examined in more detail.

In regulatory terms, investment advice includes the inquiry and recording of investment objectives. Investment advice objectives are also important to many experts. “Investors should become aware of their goals, keep them in mind, follow them in a disciplined manner and review them again and again.” This may be helpful for a rational investor, but the factual importance of substantive investment goals is low.

As an example of an investment objective, the desire to be financially independent in old age will be discussed. Important for an investor-oriented recommendation is the investor’s risk tolerance, which should be asked separately and independently of the objective. This risk tolerance defines a corridor. If the age at which financial independence is desired is in the near future, a lower risk within the corridor is recommended; if the investor still has plenty of time, the risk may be higher.

The differences between corridors of risk tolerance are greater than more or less risk within a corridor. Neither the investment objective nor the remaining investment horizon changes the answer to the question of how to deal with losses in the portfolio. An investment strategy that matches the chosen risk appetite should make market corrections such as we are seeing now bearable. The answer to the question described at the beginning is do nothing and stick to the investment strategy.

Empirical Evidence

When investors are asked what they actually invest their money for, they formulate goals that in many cases were not at the beginning of the investment decision, but are the expression of rather diffuse desires. In our own empirical research, we asked about the time periods in which investors think about investing money (unpublished, 364 investors).

According to this research, there are only two distinguishable investment time periods that guide investment decisions: Short (1-4 years: “I need money soon”) vs. Long (>5 years: “I don’t need the money soon”). Our parallel survey of 82 advisors confirmed these investment time frames.

In practice, we recommend starting from the desire for “capital growth” instead of asking about investment goals and thereby creating false expectations. If there are investment goals, they are valuable hints, but not more.

Investment Goals in Literature and Research

Human experience and behavior can be explained entirely without goals and their associated emotions. From the perspective of behaviorism, life is characterized by rewards, which we seek, and punishments, which we avoid. As a result, certain behaviors are formed. In terms of investment, this means that those who have already realized heavy losses only to miss out on a market recovery will probably be cautious about realizing their book losses again the next time the market corrects.

A separate branch of research is devoted to longing, which is described as an intense, long-term, hard-to-fulfill desire for people, things, events or experiences. Longing is present in many, and whether one has any oneself is something everyone can easily answer. Longings appear diffuse in terms of goals, which makes them unhelpful for questions of investment, especially because their lack of a timeline (cf. Scheibe, Freund, and Baltes, 2007).

The Goal Setting Theory in psychology describes how goals must be set in order to make athletes successful. Goals should be realistic and achievable, appropriate, and best communicated by a coach. The definition of requirements for the formulation of goals works well in sports. If one transfers this to the investment, the requirement “realistic” becomes assessable only in the future.

Derived from this is the role of visualizing the future. To see where the investment will end up stimulates desires that the customer might have had for a long time. Also what is realistically possible becomes visible and using the power of calculating probabilities, the financial basis from which any goals can be realized becomes visible.

Recommendations for Investment Consultants:

  • Visualize future developments that may arise from the investment and show the customer what to expect in an attractive manner.
  • Ask your clients about their goals only to the extent required by regulation. Assume that the goals are usually diffuse ideas with little motivational power.
  • Ask explicitly about the investment horizon as part of customer profiling. Short or long term is easy to decide and relevant for determining the right risk for an investment.

With professional software solutions for investment advice that visualize how the money investment is likely to develop, aha moments are created for customers and encourages them to decide what to do with their money. Ideally, the advisor becomes an enabler of the future and creates an emotional bond thru the service. Read our Guide to Digitization, where we outlined how the opportunities regulatory requirements present can be monetarized.

Munich, 11/12-22,
Dr. Lothar Jonitz, Matthias Brabetz

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