When tech tools are too good, clients may suffer

If you surveyed clients about their new year’s resolutions, there’s a good chance you heard vows to cut down on phone use thrown in with the standard pledges (eating better, drinking less, saving more) earnestly declared from the rubble of December’s excesses.

Vows of mobile abstinence may not seem like good news if you work for one of the many firms that has invested in online platforms, keen to out-fintech the fintechs on user experience. You want clients to use your platform and enhance their investing experience. You want them to enjoy it, even.

For financial services apps, though, there’s a contradiction in purpose. Tech platforms are designed to hold users’ attention. This ethos is built into the user-friendly platforms we point to as models for the frictionless experience financial services firms should provide in their online tools.

The goal for asset managers is very different. Firms want clients to keep their money invested. And there’s reason to believe that the more time clients spend checking their portfolios, the less likely they are to keep to their plans.

A 2015 blog post by Wealthfront president and CEO Andy Rachleff championing the robo advisor’s website and app addressed the conflict.

“Our teams of designers, engineers and content creators have examined every detail to make the experience as seamless as possible. It is simple, beautiful, and information rich,” he wrote. “Which is why it pains me to say this: You shouldn’t look.”

Rachleff explained that loss aversion—how we dislike losing money more than we like making it—is exacerbated by regularly checking a portfolio.

There are other behavioural risks to over-exposure. David Lewis, chief client officer at behavioural economics research firm BEworks, says that checking investments too frequently can affect risk tolerance.

Clients project the period of volatility they’re currently living through into the future. “That tends to increase their risk aversion: they make suboptimal decisions and decide to sell,” he says.

Advisors can encourage clients to be less sensitive to volatility by imagining future uses for their money, Lewis says. They can also get pre-commitments from clients to remain invested unless the market declines by a certain percentage (ideally around 20%). This creates a self-serving bias, he says, encouraging clients to stay the course.

“The more frequently people trade, the less they actually earn in the long run,” Lewis says.

A 2014 study by U.S. robo-advisor SigFig found this was also true when it came to frequency of checking portfolios. Those who logged in daily earned an average 0.2 percentage points less over the previous year than the median-frequency checkers (eight times per month). Those who checked twice per day earned 0.4 percentage points less.

As we brace for a volatile 2019, clients could be fuelling their anxiety about a downturn not just by consuming the financial news but by checking portfolios from their phones with an ease the industry is proud to promote.

That pride may be well-earned. Tools that make it easier for clients to understand their portfolios are empowering, building stronger advisory relationships. But those relationships have to include a warning about the perils of spending too much time on portfolio apps. Just because it’s there doesn’t mean clients have to use it. Advisors should recommend usage guidelines, reminding clients of their investment goals and how those goals relate to any given day in the market.

Clients resolving to use their phones less this year have their mental health in mind. Encouraging them to apply the same restraint with a state-of-the-art financial app will contribute to that goal, with the considerable bonus that it will improve their financial health, too.

Mark Burgess is managing editor of Advisor’s Edge. Email him at mark.burgess@tc.tc.

Mark Burgess

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Mark was the managing editor of Advisor.ca from 2017 to 2024.