Should You Customize Products Based On Investor Experience?
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Thursday, January 11, 2018

Should You Customize Products Based On Investor Experience?

To counteract the rise of passive indexing and safer alternatives such as ETFs, mutual fund managers need to understand that the problem often isn't the product, but the investors.

According to the Experience Divide, a survey conducted by Hearts & Wallets, inexperienced investors fundamentally have a different mindset from experienced investors and tend to be risk-aversive, so the best solution would be to understand how to approach both inexperienced and experienced investors.

In the survey, only 14 percent of inexperienced investors with more than $2 million of investable assets rated a confidence score nine or higher out of ten. On the other hand, 30 percent of experienced investors rated a confidence level higher than nine. Experienced investors emphasize that the key difference is their willingness to seek out an expert for investment guidance.

The report also partially attributes the difference in attitudes to the misconceptions that inexperienced investors have towards active management, such as a preconceived disadvantage competing with experienced investors.

"Consumers in this research are like canaries in a coal mine, revealing the concerns of the larger body of inexperienced consumers," Laura Varas, CEO and founder of Hearts & Wallets, states. "By understanding the mindsets of inexperienced consumers, higher-priced services, such as active management and advice that is deeper and broader, can identify the best ways to communicate and connect with this market."

In the survey, 44 percent of inexperienced investors strongly agreed with the statement "I'm uncertain what to invest in right now." In comparison, only 22 percent of experienced investors strongly agreed with the statement, which shows that experienced investors are more confident and open-minded to seeking opportunities.

To approach inexperienced investors who have no intention of investing, advisors may look to asset managers for more products that incorporate recognizable brands and safer options could allow advisors to help investors build up experience and confidence levels.

As for approaching experienced investors, Varas suggests that mutual fund firms could create different types of funds depending on investor experience or focus sales on a segmentation of investor types that aligns with the firm's investment style.

Hearts & Wallets, based in Rye, New York, is a data and consulting firm that provides retail investor data. The report surveyed individuals between the ages of 53 and 70 with $500,000 to under $5 million in investable assets.

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