Investors aren’t as smart as they think they are, and Dr. Ed Weinstein says that could be bad for your business.
The good news is nearly one-in-four investors claim to understand the term “reciprocity fees,” and almost half say they carefully consider the “standardized cost-return index” before investing in a mutual fund.
“The bad news is that neither of these things actually exist,” says Dr. Ed Weinstein, President of The Brondesbury Group. The seasoned researcher and his colleagues quizzed investors on these fictional terms in part to highlight how confusing industry jargon can be.
“But the real indication of this research is that investors don’t know as much as they think they know, and a lot of what they know is really very superficial,” he says. “People understand the words in a complex term one at a time—they know the word ‘reciprocity’ and the word ‘fee’—so they fool themselves into thinking they understand the whole. So much for the maxim that you should invest only in things you understand.”
But surely investment understanding is greater among wealthier and more sophisticated investors?
“Not necessarily,” cautions Weinstein. “Accredited investors can be the trickiest to deal with, because even though they generally have more knowledge, they are also more prone to overstate what they know. It’s harder to sort out what’s bluster and what’s real, because when an investor has more education and a bigger portfolio, they want to appear in control. The most over-confident investors are well-educated men aged 35 to 45 with high incomes.”
Assets at risk
Why should this dubious understanding matter to investment firms? Weinstein points to more than 30 years of research supporting the idea that a banking client is dramatically more loyal when they own three or more banking products.
He believes investment firms will have a hard time replicating this share-of-wallet and loyalty unless their clients truly understand how their money is invested.
“As people have more investments, they have more interest in understanding what they own. So if you want to sell a client a new product, there is a need to help them understand it. For example, if I’m in a money market fund now, what can you interest me in next? It depends on what you can explain to me and get me to accept.”
Weinstein says the onus is clearly on the seller to help investors accept new ideas, but it takes a graduated approach.
“Most investors don’t want to have to understand words like beta and duration. That’s why you need to convey information in plain language first, and provide the additional technical detail as an option for those who actually want it.”
The financial industry tends to make information overly complex—especially when the audience is high net worth or institutional. While detail is appropriate in many situations, keeping things short and easy-to-digest aids in understanding and increases sales opportunities almost every time.
The most over-confident investors are well-educated men aged 35 to 45 with high incomes.