Since the beginning of February, stocks and bonds both succumbed to volatility—they have been gyrating down, then up, then down again. During one of the worst drops, on Monday, February 5, several investing websites—digital advisors Wealthfront and Betterment, as well as online brokerages Charles Schwab and Vanguard—crashed, making it impossible for clients to log in for brief periods, according to a Bloomberg report.[i] On Tuesday, February 6, as the stock market gyrated before the afternoon’s climb, Fidelity reported sporadic problems with its website.[ii]
Although no one would advocate denying investors access to their assets, it may be that having these websites go dark for a bit served as an unintended blessing in disguise, in the end. Asset prices, despite periodic derailments by political and trade news, are inching back toward their highs. Those investors who did not panic and sell may well have the last laugh, along with those who bought the dips. As always, the human factor—our propensity to panic during bouts of volatility—overwhelms all but the most disciplined.
WEALTH MANAGEMENT NUDGES
The 2017 Nobel Prize in Economics went to Richard Thaler, lionized by the financial community for his practical approach to behavioral economics. In addition to identifying the cognitive foibles that make most humans poor savers and investors, Thaler, along with such collaborators as Shlomo Benartzi and Cass Sunstein, pioneered new ways of thinking about saving, investing and other consumer behavior, geared toward creating structures that would make individuals more likely to act in their own self-interest—in some cases, without even trying. This idea, that individuals could be “nudged” into better long-term decisions by creating a more positive decision matrix, might be familiar to parents of toddlers (“would you like apple or cheese?” gets parents who want to keep candy off the menu better results than “what would you like to eat?”); but in the economics world, it spawned a school of research, a best-selling book entitled Nudge: Improving Decisions about Health, Wealth, and Happiness, changes to 401(k) programs and organ-donation registries, and that Nobel.
In Nudge, Richard Thaler and co-author Cass Sunstein defined that eponymous effect this way: “any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives.” Here’s a simple example, one of the first: to increase workers’ participation in 401(k) plans, make the opt-in automatic and the opt-out what you have to choose to do, instead of the reverse. Then raise the contribution automatically each year, at the same time as the worker receives a raise—unless the worker drops out. First tried at Phillips Electronics, where Benartzi and Thaler did the foundational research for their Save More Tomorrow plan, this new savings structure may have added as much as $30 billion to retirement accounts around the world, according to Benartzi.
Robo-advisors could be considered the ultimate nudgers, because they aim to improve investor performance by reducing or even eliminating the need for repeated real-time choices. Thaler and Sunstein were well aware that asset allocation and rebalancing decisions typically flummox investors. In Nudge, they cite a woman who has a 50/50 balance in stocks and bonds when she first sets up her portfolio. At the end of the year, stocks have performed well—as they did in 2017--and the portfolio ends up 2/3 stocks and 1/3 bonds. And now, this hypothetical investor has to decide what to do: Rebalance to the original 50/50 or stay in stocks since they are doing well? Disciplined rebalancing is counter-intuitive; clients are more likely to consider it throwing away good money rather than reweighting toward undervalued assets. Even financial advisors may hesitate to push a client to sell winners.
Digital wealth management tools have the potential to become the nudge that aids investors (including financial advisors) to make the right decision. My firm, Emotomy, is a digital wealth management platform that allows human investors and their financial advisors to hypothesize about “buy and hold” vs. “rebalance,” check how either portfolio would have performed historically, and draw conclusions with a lot more than greed and fear as their guiding lights. Programmed rebalancing nudges you toward the right decision while providing enough flexibility to let you decide whether your clients risk catching a falling knife. If you think about it, that’s what digital platforms did (though not on purpose, and perhaps not in any kind of compliant manner) when they failed during February’s most volatile days—they nudged investors into inaction, preventing panic sales and incautious buys until the markets settled a bit.
Another way digital wealth management can help is to act as a “safety brake” on active portfolios. Take, for example, the internet giants Facebook, Amazon, Netflix and Google—the FANG stocks. Despite frothy valuations, or perhaps because of them, clients are eager to buy, a classic behavioral-finance conundrum that requires a nudge toward a better decision. At Emotomy, our nudge of choices are stop-loss triggers and various overlay strategies that are applied to a FANG strategy.
At a time when assets of almost every type are richly valued, taking emotions and behavioral glitches out of portfolio decisions is incredibly important. When asset values are high, so is the risk of loss. Advisors, like their clients, are human and must resist their impulse to dump losers and hang onto winners. Sometimes, if you don’t rebalance, the market rebalances for you—and not in your favor.
Turning to a digital platform to nudge yourself into rebalancing, while offering the opportunity to postpone, allows advisors both to go automatic and to retain some autonomy. That makes it possible for them to truly act as advisors, and engage with clients in the context of their individual circumstances. The nudge is there—along with humanity. As Thaler himself once said, “The real goal of a financial advisor is to help each client understand what’s possible and what isn’t.” Knowing the future of asset prices may be impossible but creating and maintaining a disciplined process is—and digital wealth management like Emotomy makes it executable for everyone.[i] https://www.bloomberg.com/news/articles/2018-02-05/robo-adviser-websites-crashed-cutting-clients-off-from-accounts
[ii] https://advisorhub.com/robo-adviser-websites-crash-cutting-off-access-accounts/?utm_source=Pinpointe+-+AdvisorHub+News+%28no+ml%29&utm_medium=email&utm_campaign=2%2F7%2F18+Wednesday+12%3A30+PM
Although no one would advocate denying investors access to their assets, it may be that having these websites go dark for a bit served as an unintended blessing in disguise, in the end. Asset prices, despite periodic derailments by political and trade news, are inching back toward their highs. Those investors who did not panic and sell may well have the last laugh, along with those who bought the dips. As always, the human factor—our propensity to panic during bouts of volatility—overwhelms all but the most disciplined.
WEALTH MANAGEMENT NUDGES
The 2017 Nobel Prize in Economics went to Richard Thaler, lionized by the financial community for his practical approach to behavioral economics. In addition to identifying the cognitive foibles that make most humans poor savers and investors, Thaler, along with such collaborators as Shlomo Benartzi and Cass Sunstein, pioneered new ways of thinking about saving, investing and other consumer behavior, geared toward creating structures that would make individuals more likely to act in their own self-interest—in some cases, without even trying. This idea, that individuals could be “nudged” into better long-term decisions by creating a more positive decision matrix, might be familiar to parents of toddlers (“would you like apple or cheese?” gets parents who want to keep candy off the menu better results than “what would you like to eat?”); but in the economics world, it spawned a school of research, a best-selling book entitled Nudge: Improving Decisions about Health, Wealth, and Happiness, changes to 401(k) programs and organ-donation registries, and that Nobel.
In Nudge, Richard Thaler and co-author Cass Sunstein defined that eponymous effect this way: “any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives.” Here’s a simple example, one of the first: to increase workers’ participation in 401(k) plans, make the opt-in automatic and the opt-out what you have to choose to do, instead of the reverse. Then raise the contribution automatically each year, at the same time as the worker receives a raise—unless the worker drops out. First tried at Phillips Electronics, where Benartzi and Thaler did the foundational research for their Save More Tomorrow plan, this new savings structure may have added as much as $30 billion to retirement accounts around the world, according to Benartzi.
Robo-advisors could be considered the ultimate nudgers, because they aim to improve investor performance by reducing or even eliminating the need for repeated real-time choices. Thaler and Sunstein were well aware that asset allocation and rebalancing decisions typically flummox investors. In Nudge, they cite a woman who has a 50/50 balance in stocks and bonds when she first sets up her portfolio. At the end of the year, stocks have performed well—as they did in 2017--and the portfolio ends up 2/3 stocks and 1/3 bonds. And now, this hypothetical investor has to decide what to do: Rebalance to the original 50/50 or stay in stocks since they are doing well? Disciplined rebalancing is counter-intuitive; clients are more likely to consider it throwing away good money rather than reweighting toward undervalued assets. Even financial advisors may hesitate to push a client to sell winners.
Digital wealth management tools have the potential to become the nudge that aids investors (including financial advisors) to make the right decision. My firm, Emotomy, is a digital wealth management platform that allows human investors and their financial advisors to hypothesize about “buy and hold” vs. “rebalance,” check how either portfolio would have performed historically, and draw conclusions with a lot more than greed and fear as their guiding lights. Programmed rebalancing nudges you toward the right decision while providing enough flexibility to let you decide whether your clients risk catching a falling knife. If you think about it, that’s what digital platforms did (though not on purpose, and perhaps not in any kind of compliant manner) when they failed during February’s most volatile days—they nudged investors into inaction, preventing panic sales and incautious buys until the markets settled a bit.
Another way digital wealth management can help is to act as a “safety brake” on active portfolios. Take, for example, the internet giants Facebook, Amazon, Netflix and Google—the FANG stocks. Despite frothy valuations, or perhaps because of them, clients are eager to buy, a classic behavioral-finance conundrum that requires a nudge toward a better decision. At Emotomy, our nudge of choices are stop-loss triggers and various overlay strategies that are applied to a FANG strategy.
At a time when assets of almost every type are richly valued, taking emotions and behavioral glitches out of portfolio decisions is incredibly important. When asset values are high, so is the risk of loss. Advisors, like their clients, are human and must resist their impulse to dump losers and hang onto winners. Sometimes, if you don’t rebalance, the market rebalances for you—and not in your favor.
Turning to a digital platform to nudge yourself into rebalancing, while offering the opportunity to postpone, allows advisors both to go automatic and to retain some autonomy. That makes it possible for them to truly act as advisors, and engage with clients in the context of their individual circumstances. The nudge is there—along with humanity. As Thaler himself once said, “The real goal of a financial advisor is to help each client understand what’s possible and what isn’t.” Knowing the future of asset prices may be impossible but creating and maintaining a disciplined process is—and digital wealth management like Emotomy makes it executable for everyone.[i] https://www.bloomberg.com/news/articles/2018-02-05/robo-adviser-websites-crashed-cutting-clients-off-from-accounts
[ii] https://advisorhub.com/robo-adviser-websites-crash-cutting-off-access-accounts/?utm_source=Pinpointe+-+AdvisorHub+News+%28no+ml%29&utm_medium=email&utm_campaign=2%2F7%2F18+Wednesday+12%3A30+PM
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