‘Irrational’ asset allocation decisions reinforce the need for advice: research

Inaccurate recollections of past performance are leading investors to make irrational asset allocation decisions, according to new research from iFactFind founder Dr Paul Moran.

In a presentation at the FPA Professionals Congress in Sydney this week, Dr Moran said that the findings of his doctoral research reinforce the value of professional advice.

“The most important factor in investment decision-making is people’s perception of past performance and most of the time that perception is poor or just plain wrong,” he said.

“When asked to choose the best past performer out of superannuation, Australian shares and residential real estate, more than 60 per cent of people got it wrong yet they indicated that past performance was a significant factor in their asset allocation decisions.”

Dr Moran, who is also principal of Melbourne-based Moran Partners Financial Planning, surveyed 280 individuals, half of whom had an ongoing relationship with a financial planner.

38 per cent respondents identified Australian shares as their preferred asset class based on past performance, while 33 per cent selected real estate and 26 per cent chose super.

But when asked to choose their preferred asset class based on their expectations for future performance, Dr Moran said that nearly 48 per cent of those surveyed identified Australian shares, 18 per cent chose real estate and 33 cent selected super.

“People can give very different responses to the same question, depending on how the question is framed, therefore, relying on a one dimensional, mean variance approach to assessing risk tolerance without consideration for investor beliefs and perceptions about risk is dangerous,” he suggested.

The findings pose challenges for proponents of digital advice, who view it as the solution to issues related to affordability and accessibility, according to Dr Moran.

“If clients don’t know what they don’t know, and digital advice platforms only ask questions designed to obtain a predetermined outcome, otherwise called an algorithm, it is questionable how much they can really help,” he argued.

“Problematically, people typically use digital experiences to obtain pleasurable outcomes, like buying clothes and concert tickets, but not for things like life insurance and topping up super, which doesn’t help solve the advice access issues.”

Overall, Dr Moran stated that his research reinforces the importance of having an experienced financial adviser to guide clients in making smart decisions.

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.