Client behaviour key to investment outcomes, according to Discovery Invest
In March 2020, the global equity market crash saw the JSE shed R3.3-trillion, equivalent to almost two-thirds the value of South Africa’s GDP.
Many investors panicked and pulled their money from the market, missing out on some of the best days of investment performance in the last 10 years!
Studying the impact of behavioural biases on clients’ investment habits shows that behaviour is often as important as market performance in achieving optimal retirement outcomes.
This is why “Discovery products are built to manage and incentivise better client behaviours,” says Craig Sher, Head of Research and Development at Discovery Invest.
Historically, in their interactions with advisers, investors have emphasised the need for lower fees and their focus tends to be on past performance.
“Yet there’s substantial data indicating that client behaviours are often far more significant predictors of investment success,” says Sher.
For example, the below graph assumes that an investor is contributing 15% of their salary, aiming at achieving 5% annual real return over 25 years.
If the market performs as projected, the investor will receive 100% of what they expect after 25 years. If the market underperformed this projection by 2% per year, the investor will receive only 73% of their long term expectation.
If, however, the investor saved 5% less of their salary over the same period, the investor will only achieve 67% of their expectation even if the market performs as expected.
This shows how behaviour can have as profound an impact on investment outcomes as the market itself.
Equally, managing behavioural biases, especially when it comes to market timing, choosing funds, and managing risk is critical.
On timing, for example, “strong investment returns usually happen over a few days of exceptionally high performance that are largely impossible to predict,” says Sher.
The below graph shows that between 2013 and 2023, the S&P 500’s five best performance days happened during Covid, in March and April 2020.
Investors who missed these five critical days (purple line) achieved significantly lower outcomes than those who remained invested and who benefitted from the exceptional performance that happened unexpectedly.
This is why Discovery products focus on equipping financial advisers to also manage client behavioural biases, maximising investment opportunities using both Discovery and leading global and local third-party asset managers.
Helping advisers to engage and advise their clients on the key behavioural drivers of investment outcomes – like starting to save earlier, investing more, and withdrawing appropriately when clients retire – places Discovery’s offering significantly beyond a superficial consideration of only fees and past performance.
“Our product design keeps the adviser at the heart of the investment process, and guides behaviours that will help them achieve optimal retirement outcomes for their clients,” explains Sher.
Discovery’s shared value model encourages positive investment behaviours among South Africans by rewarding them with payouts, or investment boosts, when they do the right thing.
To date Discovery Invest has paid and accrued over R20 billion for its investors in shared-value rewards.
The model is creating better retirement outcomes in South Africa, with Discovery clients who engage on average saving more than three years longer, and also making more ad-hoc contributions to top up their investments.
They also withdraw lower amounts when they retire. A staggering 32% of the Discovery Invest Living Annuity book who receive these incentives, for example, drawdown less than 3% of their savings per year when they retire.
Craig Sher, Head of Research and Development at Discovery Invest.
“These numbers show that our shared value approach to managing client behaviour is also working to improve South Africa’s savings and investment culture, reducing the proportion of people who end up relying on their families, communities, the state or debt for survival” says Sher.
Moreover, by empowering advisers with the research, insight, and incentives to manage client behaviour, Discovery is partnering with advisers to improve their own clients’ outcomes significantly.
In short, equipping advisers with the ability to manage client behaviour within a shared value architecture not only enables higher retirement product performance but also “keeps the adviser at the heart of a personalised investment process, creating new relevance and value for advisers in an increasingly complex world,” concludes Sher.
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