Emotional Decisions Cost New Zealand Investors At Least 1% Each Year

More than half of wealth managers believe clients lose 1% or more a year

New research* from behavioural finance experts Oxford Risk shows New Zealand investors are losing money every year because they let their emotions drive decision making.

Its study with wealth managers in New Zealand who collectively manage assets of around $144.5 billion, found that more than half (56%) believe the average investors loses 1% or more of their investable wealth each year due to emotional decision making. One in 12 (8%) wealth managers estimate losses could be 2% or more a year. None of the wealth managers interviewed believe investors do not suffer any losses from emotional decision making.

The research found 78% of wealth managers agree emotional decision making is a major cost for investors and 80% say their clients regularly make investment decisions based on their emotions.

Wealth managers are generally agreed that helping clients manage their emotions is a major part of their role – 88% agree it is a key part of their job. They also generally believe they understand their clients’ risk tolerance with 86% saying they have a very good understanding.

However the study found around three-quarters (74%) of wealth managers say they are sometimes surprised by the decisions clients make despite their understanding of their risk tolerance.

Oxford Risk, which launched in New Zealand nearly two years ago, builds software to help wealth managers and other financial services companies assist their clients in making the best financial decisions in the face of complexity, uncertainty, and behavioural biases.

It believes that many wealth managers and financial advisers need better systems and tools to support clients particularly in the light of recent events such as the financial impact of COVID-19, high inflation and high levels of volatility.

Bianca Kent, Head of Client and Strategy, New Zealand at Oxford Risk said: “Making investment decisions based on emotions is costing New Zealand investors every year and the losses on investable capital accumulate the longer people invest.

“It is encouraging that wealth managers recognise the issue and that they recognise that a key part of their job is helping investors to avoid the temptation to do something when there is negative news.

“Wealth managers however need better tools and systems to enable them to provide support to investors as it is clear that current methods are not adequately addressing the problem.”

Oxford Risk’s behavioural tools assess financial personality and preferences as well as changes in investors’ financial situations and, supplemented with other behavioural information and demographics, build a comprehensive profile. Oxford Risk’s financial personality tests can measure up to 20 distinct dimensions, of which six reflect preferences for sustainable investing.

It believes the best investment solution for each investor needs to be anchored on stable and accurate measures of risk tolerance. Behavioural profiling then provides an opportunity for investors to learn about their own attitudes, emotions, and biases, helping them prepare for the anxiety that is likely to arise. This should be used to help investors control their emotions, not define the suitable risk of the portfolio itself.

-Ends-

Notes to editors

* Independent research company PureProfile interviewed 50 wealth managers in New Zealand responsible for $144.4 billion assets under management during January 2023.

About Oxford Risk 

Founded in 2002 by leading decision science academics from Oxford University, Oxford Risk are experts in behavioural finance and financial well-being.They understand how people perceive risk, make judgements about risk, and behave in risky situations. They know how best to elicit and convey information to ensure those perceptions, judgements, and behaviours reflect true intent.

Oxford Risk applies behavioural finance expertise and technology to help its clients deliver superior advice and service more efficiently.

Benefits of behavioural finance-based solutions:

Stronger Compliance 

Produce more consistent and objective advice with a robust digital audit trail and future proof regulatory requirements.

Reduced Costs 

Engaging digital delivery streamlines human decision processes, improves efficiency, and focuses human effortwhere it is most valuable.

Increased Revenue 

Deeper client insight and engagement increases satisfaction, ultimately driving share of wallet and word of mouth referrals.

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