It is a commonly held assumption that choice is a good thing but is it? Research carried out by Columbia and Stanford universities claims that people are now suffering from choice overload.
In one experiment, two sets of consumers were offered free tastings of jam. One group were offered six jams to choose from and the other a selection of 30 jams. The conversion rate into shoppers was significantly higher with the smaller offering of jams, resulting in nearly 10 times the number of purchases. Many of the people who chose from 30 jams stated that while the buying experience was enjoyable, it was difficult and frustrating. Six choices seem to be right for most people.
Has this any relevance to investments? Do investors like having thousands of funds to consider? Does lack of choice make them feel short-changed? Or do they want some choice in the form of a few carefully selected options?
According to analysis from US financial services research company Dalbar, most investors get into markets at a high point and tend to invest in new flavour-of-the-month funds. When do they sell? Usually after a period of short-term underperformance.
Looking at how they allocate their assets can be even more eye-opening. A sampling of thousands of retirement plan participants reveals that investors at all ages tend to be clustered at the extremes with either 100 per cent of their retirement assets in equities or 100 per cent in cash. Clearly, many lack the skill or discipline to diversify assets properly.
As an adviser, how many investment funds do you offer to your clients and do you really have time to do the right levels of research? Maybe a panel of multi-manager funds is what they and you should be looking for?
However, there are still over 300 multi-manager funds in the UK to choose from, so how can you reduce the choice still further? Some things you may consider are:
– Total expense ratio. A TER above 2 per cent can make investment an expensive experience.
– Old Broad Street rating. Very few funds are good enough to have an independent rating from this agency.
– Experience. Does the investment team have depth and experience in running money?
– Risk versus performance. What is the information ratio on the fund? Is it taking too much risk to deliver performance?
– Company strength. Is the investment company going to be around in 10 years? Is it committed to the multi-manager market?
Although you are reducing choice for clients, you are really increasing it as multi-manager teams choose from the entire universe of thousands of retail and institutional funds.
Simon Ellis is managing director of Fidelity International’s multi-manager business.