Adviser-to-client template: Preparing for 2026

For financial advisers to use with clients.

This document is intended to support your service proposition to clients. It is produced by our investment writers with a deliberately light tone and structure. However, these are guidance paragraphs only. It is not guaranteed to meet the expectations of regulators or your internal compliance requirements. If you wish to remove or amend any wording, you are free to do so. However, please bear in mind that you are ultimately responsible for the accuracy and relevance of your communications to clients.

Dear Client,

I know we say it every year, but 2025 went quickly! I hope you were able to take some time off and spend it with your loved ones before we get started in 2026. Last year was often tumultuous in markets, but as a result, it also proved many time-tested investing principles: to keep a cool head, to stay invested, and to always concentrate on an investment’s value over price. Our investment manager, Morningstar, will continue using this playbook, staying focused on the building blocks of investing.

So far, 2026 has started similarly to 2025, with the U.S. government delivering some policy decisions that have shocked markets. You’ve likely heard of many of these, including direct interventions in the defence, finance, homebuilding and mortgage industries, as well as orchestrating a regime change in Venezuela. That, plus outright attacks on Jerome Powelll, the chairman of the U.S. Federal Reserve, could all go some way to erode investor sentiment. That said, by sticking to a robust investment process and adhering to behavioural investing principles, investors can expect to navigate through this period, and periods of similar uncertainty, with confidence.

AI was also a big player in 2025, and we expect that to continue as 2026 unfolds. Morningstar’s investment team have considered how it will impact the broader economy, and expect that increased AI spending will go some way to dampening inflation, as more widespread use increases productivity and reduces costs. It’s also interesting to note parallels with the internet commerce boom of the late 1990s, which saw strong results in bonds.

And though we can’t predict exactly what curveballs 2026 will send our way, we do know that volatility is a feature, not a bug, of investing. As always, the best way to prepare is to stick with the fundamentals and tune out the noise. And, with Morningstar’s proven process, your investments are in good hands.

To that end, it would be remiss of me not to mention that Morningstar Investment Management took out two awards at the Financial Newswire Fund Manager of the Year Awards last year, and were highly commended for two more. It’s a pleasure to work with them, and if you have any questions about your portfolios, I’d be happy to answer them. For more details, refer to this article.

As the new year starts, it’s always a great time to talk about or revise your financial plan. Please feel free to reach out any time and we’ll get something on the calendar. I look forward to speaking soon.

Regards,

Adviser

Important Information

As noted previously, this document is intended to support your service proposition to clients and the commentary does not constitute investment, legal, tax or other advice and is supplied for information purposes only. Past performance is not a guide to future returns. The value of investments may go down as well as up and an investor may not get back the amount invested. The information, data, analyses, and opinions presented herein are provided as of the date written and are subject to change without notice. Every effort has been made to ensure the accuracy of the information provided, but Morningstar makes no warranty, express or implied regarding such information. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or losses resulting from, or related to, the information, data, analyses or opinions or their use

Don’t Let Risk Misperceptions Cloud Your Clients’ Portfolios

By Nicki Potts and Dr. Danielle Labotka

Build knowledge and confidence to guard against the jitters.

Have you ever had a client who unexpectedly loses their nerve amid jittery markets? It’s not uncommon to see clients whose risk tolerance suggests they should be able to withstand the fluctuation in their portfolio react with a much more conservative risk tolerance. Has your risk tolerance questionnaire failed?

The culprit may not be your clients’ risk tolerance at all but rather their risk perception. Risk tolerance is an enduring psychological trait that reflects how we feel emotionally about taking risks. Risk tolerance does not tend to change, even as we transition through life stages and market cycles. Risk perception, on the other hand, is our cognitive appraisal of a given risk. Whereas risk tolerance guides how we respond to risk, risk perception determines how risky we find something in the first place. Unlike risk tolerance, risk perception can be quite fickle.

Advisers are no strangers to handling risk tolerance; good financial planning is built on balancing a client’s risk tolerance with their capacity and needs. However, advisers also need to learn how to manage their clients’ perception of risk to keep them on track. Left unchecked, poorly calibrated risk perception may lead to suboptimal behaviors both in good times (chasing returns) and bad (panic selling).

Risk perception can be challenging to manage, as it’s influenced by many external and internal factors (even cloudy weather!). Nonetheless, advisers can help clients better evaluate risk by building a solid foundation based on context, expectations, and confidence.

Defuse the Unknown by Putting Risk Into Context

It’s natural to fear the unknown, as we tend to fill in gaps in our knowledge with worst-case scenarios, making us believe something to be riskier than it is. For many everyday investors, one of the biggest determinants of how risky they perceive an investment is how familiar they are with the product in the first place. However, market volatility may affect clients’ perception of risk regardless of their familiarity with their investments. As market volatility is inherently unpredictable, it can foster feelings of dread over losing money, which can lead clients to evaluate an investment as riskier than they typically would.

Though advisers cannot control market volatility, they can educate their clients on their investments to defuse the fear of the unknown. Educating clients means not only ensuring they understand how various investment vehicles work but also what volatility means for them. Clients’ plans are built with their goals and accepted risk strategies in mind. Therefore, advisers can help clients contextualize any proposed actions in response to uncertainty by evaluating them from the standpoint of “Is this consistent with the plan we’ve agreed to?” This context can help clients anchor back on their goals, stick with their commitments, and feel confident that their plan is tailored to get them where they want to be.

Although clients can recalibrate their risk perception amid volatility, it is best to prepare them beforehand. If your clients often react adversely to market volatility, they are likely surprised. This means their expectations for what risk should look like do not align with their reality.

You can minimize risk misalignment during uncertain times by building a solid understanding of investment risk from the get-go. Clients will particularly benefit from understanding the relationship between risk and return and the range and likelihood of possible outcomes (including the possibility of extreme events). Start with a robust, stable risk tolerance measure to determine how much risk your clients are comfortable taking and are willing to accept in pursuit of their goals, while attending to their risk capacity. Then, illustrate, explore, and test the reasonableness of clients’ expectations against historical performance to identify gaps. Check in periodically with clients to manage creeping expectations and further consolidate understanding.

Risk perception can be affected by the knowledge, context, and expectations your clients have, especially when markets are in turmoil. Advisers are well-placed to arm clients with the framework they need to appropriately evaluate risk.

Improve Risk Calibration by Building and Managing Confidence

Education is the first step to helping clients better evaluate risk, but confidence also plays an important role in our judgment of risk. Clients who have confidence in their plan, their adviser, and their own knowledge will be better able to manage their risk perception. As outlined above, education helps build trust in an adviser’s expertise, making clients confident they can rely on their adviser’s guidance. Just as advisers benefit from continuing professional development, clients can fine-tune their risk assessments and improve their confidence through continued structured learning, guidance, and support.

However, advisers must also help clients recognize when overconfidence may lead their risk perception astray. In particular, cognitive biases may make us feel more confident in our conclusions than warranted. For example, a common mental shortcut is the availability heuristic, where we draw conclusions based on familiar or readily available information. That can be helpful but can also inflate our confidence. When headlines, influencers, friends, and family are feeding us the same message, we tend to forget or ignore contradictory information.

Clients may rely on numerous shortcuts when forming judgments, and advisers cannot expect to identify and provide guidance on every occasion. Instead, advisers can help their clients craft a set of decision rules they can rely on when making risk judgments to help combat overconfidence that may come from mental shortcuts. For example:

Is this information from a reliable source?
Is it supported by objective evidence?
Are there counterarguments? What are they?
Am I in the right emotional state to make decisions?
What is the likely impact on my strategy and goals?

The objective is to equip clients with tools and processes to readily make informed judgments and recognize when bias may be at play. This will help clients combat the false confidence that cognitive biases can bring and help them come back to the fundamentals of their education, where true confidence should live.

Market sentiment can affect your clients’ perception of risk in their portfolio; in turn, this can make them want to make changes to their investment strategy. But investment strategy changes should be driven by changes in things such as goals and circumstances, not market sentiment. When clients’ risk perceptions are miscalibrated, advisers should provide them with the education and confidence they need to realign their perceptions with reality. Managing clients’ knowledge, expectations, and confidence sets them up to make informed risk choices.

Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg. Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.

From the desk of the CIO: Looking ahead

By Matt Wacher, Chief Investment Officer, APAC

Key points

Markets to remain volatile
Focus on fundamentals, probabilities and price
Granular research is key

Though 2025 threw many challenges at investors, the great news is that it also brought many closer to reaching their goals by delivering unusually high returns. This is to be celebrated, especially as investors were tested in March as markets sold off. Staying the course by remaining invested, focusing on goals rather than media headlines, and responding to value proved the most effective way to deal with the shocks and volatility. We expect that tried-and-tested playbook to be just as effective this year.

Coping with whatever 2026 brings will require investors to know what to respond to, by staying focused on the building blocks of investing: fundamentals, probabilities and valuation. Questions to ask as conditions change include: how much will the new information really impact asset cashflows, relative to other factors that also matter? How will it change the range of scenarios and how likely they are to occur? Is the news already priced in or has there been an under or overreaction?

Last year, this approach added a lot of value. In our Morningstar managed portfolios and funds, we bought equities and sold bonds in early April as we assessed that equities were oversold on the Tariff Day news. Later in the year, we added to healthcare stocks after fears rose of adverse regulation, and we took profits in utility companies after the AI-led surge. We also added to Korean equities in the wake of the tariff fears, at very low prices.

In many ways 2026 has started out just like 2025 – a barrage of policy shocks driven by the US government. These include direct interventions in the defence, finance, homebuilding and mortgage industries, plus regime change in Venezuela. Most high profile of all is the outright attack on the chairman of the US central bank. This could erode trust and signal that much lower interest rates lie ahead, but many other factors will also play a role in driving outcomes.

We expect AI to continue playing a big role in 2026, in terms of economic, company and market behaviour. We have revised our US GDP growth forecasts on the back of increased investment spending and expect AI to dampen inflation, as adoption enhances productivity and reduces costs. There is a parallel with the growth in internet commerce that took off in the late 1990s, which was a boon for bonds.

We have also revised our fair value estimates for major corporate players including Alphabet, Nvidia, Broadcom and Apple, which benefit from the surge in spending or improvements in their own capabilities. There are also big beneficiaries outside the US such as Samsung and SK Hynix, both running in the global race to achieve AI superiority. Delivering mas sive sales and profits, they are priced more conservatively than their US counterparts.

One headwind for investors is that more optimism is embedded in share and corporate bond prices, after the rally of the past 12 months. We think returns will inevitably be lower in 2026 but can be boosted by more active than passive opportunities that look beyond major markets and industries.

Morningstar Investment Management’s fundamental, long-term approach takes a rational approach in the face of volatility and unpredictable market movements, knowing that the only thing we can trust in markets is that turbulence is a given. Ultimately, 2025 was a testament to the core principles of investing, and we expect these methods to continue holding investors in great stead in 2026.

Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg. Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.

Adviser-to-client template: Lessons from 2025

For financial advisers to use with clients.

Dear Client,

We say it every year, but 2025 has gone quickly! From tariff announcements in April to talks of AI bubbles now, it’s been a long and sometimes trying year in investment markets. But these events have also served to remind us of the core principles of sensible investing: to have a diversified portfolio, to keep behavioural biases in check, and to stay the course.

What can we learn from the year that was?

As we look to 2026, there are some key learnings we can take from 2025. We saw some surprises in the U.S. economy, which remained resilient despite rising import tariffs. A number of factors contributed to this, with many business absorbing the new costs rather than passing them on, which kept prices stable, even if they sacrificed some profits in the process.

However, despite a strong U.S. economy, the country’s equity markets left the pace-setting to others in 2025 (despite largely leading the way in prior years). The Korean market powered ahead, while emerging markets in general enjoyed higher returns. Even the U.K. posted higher returns than the U.S. This change in the year-to-date positions serves as a valuable reminder that the starting point for any asset, and its prevailing price point and valuation, are all-important.

What can we expect in 2026?

Our investment manager, Morningstar, notes that this calm might not continue, and expects tariff effects to continue showing up in 2026, stalling growth and lifting prices. However, they also expect that the AI boom will likely offset some of these effects, particularly as its capabilities become more common and widely used across a range of applications in businesses.

This year also saw some unusually high gains, so for next year, Morningstar anticipates a return to more modest returns. They’re also cautious about companies spending a lot of money on AI, and are seeing better value in markets like the U.K. and Brazil in sectors such as healthcare and consumer staples.

What should you do to prepare?

It bears repeating, but the best thing you can do is nothing. Staying invested is one of the most effective weapons in the investors’ arsenal, and Morningstar’s portfolios are built to withstand turbulent conditions. If you have any questions about your portfolio, please don’t hesitate to get in touch.

Regards,

Adviser

Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg. Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.

Don’t Gamble With Your Risk Tool

The best risk-tolerance questions lead to meaningful conversations with clients.

By Nicki Potts, Director of Financial Profiling and Planning, and Ryan O. Murphy, Global Head of Behavioural Insights

Risk tolerance is a deeply personal trait. It shapes how we think, feel, and behave, and is a core part of our identity and psychology as investors. Yet, it’s notoriously difficult to measure this trait accurately. Despite this, risk-tolerance tools are commonplace in the industry. Many are built on shaky foundations, lacking scientific rigor or validation evidence. Advisors should choose a tool that leads to in-depth discussions to help clients understand themselves and the risks of investing.

Not All Risk Tools Are Created Equal

Most people rarely think about their risk tolerance, especially those who are new to investing. Risk tolerance is a continuous spectrum, from risk-averse to risk-seeking, reflecting how people deal with the inherent uncertainty in the world. That makes it difficult to measure: Risk tolerance can’t be assessed with a simple yes/no question. It can be hard for individuals to express their feelings about uncertainty meaningfully on a scale.

The two most common methods for assessing risk tolerance are:

Stated Preferences Questionnaires: These ask people to self-report behaviors and attitudes. For example: “How do you respond when things go wrong financially?”
Revealed Preferences Exercises: These present hypothetical choices or gambles. A sample question: “Would you prefer a guaranteed payoff of X, or a 50/50 chance of gaining Y (nothing otherwise)?”

Both approaches can be useful, though they have limitations as well. When thoughtfully designed and implemented, both of these kinds of questions can accurately measure people’s preferences in different contexts. They can produce profiles for specific situations, but that isn’t enough when it comes to measuring people’s risk preferences for investing.

A useful approach should also support meaningful conversations about risk, expectations, and behavior (both historical and anticipated). A good risk tool needs to be relatable as well as reliable. It should help advisors and clients find a language for discussions that promote understanding of the intangible probabilities of gains and losses that are inherent in investing.

That’s where stated preference questionnaires come out ahead. These questionnaires are much better at framing risk decisions and supporting investment discussions. Revealed preference exercises, on the other hand, can feel more like abstract games, or worse yet, time at a casino.

Games May Not Feel Real

Real-life risk decisions are emotional. They involve consequences that matter not only for oneself but for loved ones as well. Abstract questions using gambling terminology may disconnect people from the natural emotions around investing. Hypothetical gambles can look more like math problems than a springboard for emotional insight. Moreover, many people find math off-putting and even stressful at the extreme. Using an exclusively numerical lens for an assessment may be a disservice for people unaccustomed to, or uncomfortable with, thinking in bets.

We know risk tolerance is shaped by cumulative life experiences. While new events can influence it, changes tend to be gradual. Tools that focus only on current preferences in isolated contexts miss the emotional depth of past experiences and may misrepresent the underlying trait. Ultimately, risk tolerance measures should help people find their emotional comfort, balancing the thrill of gains with the anxiety of losses. Questionnaires that explore a range of past and present scenarios, in a meaningful context, are more likely to capture this balance accurately.

This is an active area of research in the behavioral sciences. Some research shows that the choices people make in gambling hypotheticals are seldom consistent with choices they make when presented with real-life scenarios that have the same probabilities and pay-offs. More importantly, revealed preferences choices are less transferable to real-life risk decisions, they’re less likely to predict the level and persistence of actual risk-taking behavior and in some cases made the wrong predictions when compared to stated preferences tools. Lastly, estimating people’s risk preferences reliably is a notoriously difficult task that demands scores (or even hundreds) of questions. If taken seriously, this is not a quick-and-easy exercise.

Investing is Different Than Gambling

To support investors, risk measures must go beyond abstract exercises and reflect the emotional and contextual realities of investing and financial decision-making. Advisors need tools that foster understanding and insights. They need frameworks that help clients articulate their comfort with uncertainty and align the choices they make today with their long-term financial goals. The best tools help people understand themselves so they can assess the risk involved in investing and make necessary trade-offs. In a world of enduring market uncertainty, that understanding is the most valuable asset of all.

Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg. Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.

Protected: From the desk of the CIO: What 2025 Tells Us About 2026

From the desk of the CIO: What the gold and AI booms mean for investors

By Matt Wacher

Big market moves are becoming more common, with large gains in September carrying over into October.

This is true for shares, bonds, currencies and commodities, with gold rocketing this year up over 60%. This sharp price is the result of investors and central banks buying to diversify their assets away from US dollars. We’re seeing these moves because of concerns around the high level of debt, deficits and the independence of the US Federal Reserve.

One often overlooked factor is the very small size of gold as an asset class, which can lead to exaggerated price moves in both directions when sentiment changes rapidly. As with all financial assets, huge price rises and frenzied universal popularity don’t bode well for future returns, so investors should take note of the large falls in price that followed comparable episodes in the past.

In equity markets, it’s Artificial Intelligence that is still the key driver of market returns, share prices surging for so-called ‘hyper scalars’, companies that provide global scale data centres. Here, there are clear signs of a change in fundamentals that echo those of the last great IT boom in the late 1990s. Two of note are (1) a step change in capital spending and (2) tie-ups between major players.

Spending on capital expenditure has spiked for firms that had previously sustained high rates of profitable growth without the need to invest a lot of capital. This made them highly profitable and set them apart from more traditional industries, like manufacturing and real estate, that need lots of capital to expand. But now these are spending up large on data centres, servers, advanced computer chips and even nuclear power generation. For example, this year $353bn USD of AI-related capex has been committed by just 4 companies: Alphabet; Amazon; Meta and Microsoft. The investment is of course expected to be profitable but it’s uncertain how long it will take to pay off and what the eventual return on capital will be. Right now, it is very low.

The mammoth scale of investment needed has prompted a coming together of many companies to fund and make what is required. Non-profit entity Open-AI of ChatGPT fame has been at the forefront of dealmaking, buying custom AI chips from multiple chipmakers, and Nvidia committing to invest up to $100bn in it. Microsoft is a key backer of Open AI. While these companies were already connected as suppliers to each other or joint venture partners, this extra step ties their fortunes ever more closely together and creates the conditions for a rise in the correlation of their returns. As these businesses are already large parts of stockmarket indices, investor portfolios are becoming less diversified and more concentrated. A similar dynamic existed during the late 1990s when telecom, media and IT companies became highly correlated.

So what does this mean for investors? Of course, productive investment that pays off will make these companies more valuable, but they are already priced for this. The real lesson from prior technology booms is that they are bullish for high quality bonds because they put downward pressure on global prices. AI is expected to have similar benefits in terms of reducing the costs associated with providing goods and services and improving their quality.

In our portfolios, our focus remains on opportunities and diversifiers that are not driven by the AI boom or still remain out of favour including healthcare, US small companies, UK equities, emerging markets and some traditional consumer names.

Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg. Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.

Adviser-to-client template: The golden rule

For financial advisers to use with clients.

Dear Client,

I’m betting you’ve seen the news headlines and images of people around the world (including in Sydney’s Martin Place) lining up to purchase gold bullion. No longer just the stuff of pirate legends, speculative assets like gold and cryptocurrencies are seeing increased popularity in light of recent market conditions. But rather than asking if all that glitters is gold, perhaps we should be asking whether this speculation is justified and how investors should respond.

Why are you hearing about gold?

With markets this year characterised by uncertainty and volatility, gold has attracted a lot of attention from investors. These investors are hoping to diversify, find a safe haven in a market that’s consistently been in flux, while taking advantage of rising prices. But can gold deliver on all of these promises?

What should investors be wary of?

While these assets can be tempting, it’s important to approach them with caution and a clear understanding of their risks. Yes, gold could potentially hedge against inflation or currency devaluation, and could similarly provide short-term gains. However, its long-term value is less certain compared to traditional investments.

As gold is a small asset class, its price can move dramatically in both directions when sentiment changes. And with all financial assets, these large price rises (not to mention hype) don’t bode well for future returns. In the past, where we’ve seen comparable cases, they’ve typically been followed by large falls in price – a pattern that’s well worth remembering as the gold frenzy continues.

Speculation in moments such as these can also lead to emotional decision-making that’s coloured by headlines and herd behaviour, which in turn can lead to increased portfolio risk. And as these assets are highly volatile, they may not align with a disciplined, long-term investment strategy, such as the one deployed by our investment manager, Morningstar. Instead, we – and Morningstar – urge that investors focus on fundamental analysis, diversification, and a focus on generating long-term value rather than chasing trends.

What should you do next?

In short, nothing. A well-diversified portfolio built on sound investment principles is positioned to withstand market volatility. By staying invested, you can avoid impulsive decisions that are driven by market hype.

If you have any questions about gold or more broadly about your portfolio, feel free to get in touch. I look forward to chatting.

Regards,

Adviser

Important Information

Integrating Wellness Into Financial Advice

Financial advisers can create value for clients by incorporating psychological and physiological metrics.

By Dr. Danielle Labotka and Nicki Potts

Have you noticed the number of entourage members supporting professional athletes? It takes a team of coaches, doctors, physiotherapists, psychologists, nutritionists, and legal and financial advisors to holistically manage and support an athlete’s health and well-being throughout their career.

Similarly, researchers and advisors are starting to recognize that good financial health and well-being are best achieved through an integrated approach that treats clients’ financial lives holistically. What if the financial advisor was part of an entourage that included a financial health physician, a financial mindfulness coach, and a financial crisis therapist? These professions may be hypothetical, but the thought experiment suggests real-life techniques that advisors can use today.

The Financial Health Physician

We already embrace and incorporate clients’ psychological reactions—such as how they think, feel, and process events and experiences—into financial planning. Yet, we may find it odd to consider doing the same for physiological reactions, such as our fight-or-flight responses, like heart rate, blood pressure, and muscle tension.

What role does physical health have in financial outcomes? Recent interdisciplinary research published in Financial Services Review finds that psychological and physiological responses interact with financial triggers to drive and influence our behaviors and decision-making processes. What may start as physical health stress (like sleep disturbance) can lead to mental stress (like mood swings) and a tendency to make less-than-optional financial risk-taking decisions (like panic selling during market volatility). And this effect can go the other way, too; financial stress can create anxiety, sleep disturbance, and physical unwellness.

How would a professional assist? A financial health physician mightmonitor psychological, physiological, and financial situations together in real time. This would allow them to identify core stressors at an early stage and develop an appropriate strategy to address them. For example, panic selling may be abated with a personal check-in when elevated heart rate and sleep disturbances are detected during volatile times.By attending to physical warning signs, investors could avoid costly mistakes.

The Financial Mindfulness Coach

Mindfulness is the practice of being fully aware and accepting of what you’re presently doing, feeling, and experiencing. It can enhance general well-being by reducing stress and anxiety, increasing focus, and helping regulate emotions. A new psychometric financial mindfulness scale from researchers at Cornell University and Georgetown University attempts to extend the benefits of mindfulness to financial health by focusing on the awareness of your current objective financial state (that is, how much you are spending and your financial balances) and the acceptance of that state (that is, how well you manage your emotions when engaging in financial matters).

What role does mindfulness have in financial outcomes? People can experience a disconnect between how they perceive their finances and their financial reality—you might call it money dysmorphia. This, in turn, can cause investors to feel stress and anxiety due to the perception of not having enough, regardless of their actual financial state. That can lead to clients having unrealistic financial goals, developing an inability to enjoy the fruits of their labor, and even taking on excessive debt, at the extreme.

How would a professional assist? A financial mindfulness coach would help clients identify whether they have a distorted perception of their finances. They could supply investors with appropriate measures to manage emotions and drive positive behavioral changes during periods of financial stress or discomfort. A financial mindfulness coach might also incorporate tracking and budgeting tools to drive awareness and practical mindfulness exercises to drive acceptance. By being better connected to their finances, clients could improve their financial health.

The Financial Crisis Therapist

People often need emotional, practical, or social support to manage and recover from a crisis, whether large-scale events such as pandemics and natural disasters, or personal hardships like divorce or illness. Financial crises can be just as overwhelming, so it makes sense to consider the benefits of a therapeutic approach to helping investors respond.

What role does crisis support have in financial outcomes? In times of crisis, people need support to bolster their capacity to respond to the occasion, as their emotions, thinking, and behaviors can be disrupted. As an interdisciplinary research review in the Financial Planning Research Journal demonstrates, investors look for emotional support as well as information and feedback in a crisis. As a crisis deviates further from typical circumstances, high emotions can negatively affect decision-making abilities. Support during a crisis can help investors stabilize their emotions and develop strategies to move forward.

How would a professional assist? A financial crisis therapist might support a client during a period of financial distress by helping them regain their composure and triage their issues. This kind of support would help investors gain greater resilience and improve their capacity for rebounding from setbacks.

Holistic Personalization

Clients may not be able to turn to an entourage of such professionals to improve their outcomes, but financial advisors can take on some aspects of these roles in their own practices. While you may not be taking a client’s blood pressure or making notes as they lie on a chaise lounge, you can incorporate practical tactics that incorporate mind, body, and spirit. For example, try asking clients to describe the emotions and physical sensations they are experiencing in response to their current financial state, and look for signs of distress or disconnect. Or it can be as simple as checking in with your clients about their health and whether their spending and saving goals are aligned with their values.

This kind of interdisciplinary approach integrates well with the behavioral finance practices that many advisors are already adopting. Advisors who can provide holistic support to their clients can deliver a level of personalization that unlocks not just good financial outcomes, but good life outcomes.

Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg. Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.

From the Desk of the CIO: It’s in the price

By Matt Wacher, Chief Investment Officer, APAC

Key takeaways

Global regional diversification pays off
Higher US IT valuations raise the bar for expectations
Favour areas where valuations and expectations are lower

Global diversification continues to pay off for investors with several of our overweight equity positions – Korea, China, Japan and Brazil – performing well. Gains reflect companies and/or broad economic outcomes in these countries surpassing the low bar of subdued expectations.

On the other hand, high expectations tend to be harder to beat, so it’s natural for investors to review the stellar run in US IT stocks and ask if that can continue. Most of the rally in US equities has come from a re-rating of US IT companies which are focused on AI superscalars, strongly supported by blow away earnings results from select majors including Nvidia, and more recently, Cisco Systems. While other sectors have also risen, it’s US IT that has been the key driver of the US market because of its scale.

Morningstar’s recent review of the US IT sector explored in depth the key drivers of the industry’s growth, profitability and whether there is still value. Taking the long view, it is clear that the re-rating – investors paying more per unit of sales, cashflows or earnings – has supercharged returns over the past 5-10 years. Looking forward, the big players in software, hardware, semiconductors and IT services still have a great outlook in terms of the strategic advantages (using Morningstar “MOAT” definitions of competitive strengths) that can support faster growth and higher profitability than peers and other industries.

However, it’s worth noting that uncertainty levels for future earnings growth are also very high in many cases, as AI quickens the pace of change, and poses direct threats to several business models. Seen this way, we find the overall reward for risk not attractive for US IT, given full valuations, the fast pace of change and high levels of earnings uncertainty.

We continue to see better prospects in areas where lower earnings expectations are being priced in, such as healthcare, which have been hurt by US government regulatory changes and potential tariffs. Ultimately, investors must consider what is priced in, as well as what is most likely to occur. On this basis we see less upside for US IT, and more upside for Healthcare and select Emerging Markets equities.

Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg. Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.

Adviser-to-client template: Minimising the effects of the investor return gap

For financial advisers to use with clients.

Dear Client,

“The investor’s chief problem—and even his worst enemy— is likely to be himself.” – Benjamin Graham

Something I’ve come across a lot in my day-to-day conversations is the concern that short-term market moves can derail an investor’s goals – or indeed that short-term wins dictate future success. While market corrections can be scary, investing, at its core, is about the long game. Patient investors are rewarded, while those who take the short-term view, more often than not, sabotage their financial futures. This can show up in a few ways, whether that’s by chasing yesterday’s winners, attempting to time the market and therefore buying and selling assets at the wrong times, such as pulling out during volatility, or succumbing to headline noise about the latest ‘hot’ stock.

Understanding the impact of the investor return gap

It’s these types of moves that can result in what our investment manager, Morningstar’s, behavioural finance team refers to as the ‘investor return gap’. A study recently completed by Morningstar in the US was found to ‘estimate the average dollar invested in US mutual funds and exchange-traded funds earned 7.0% per year over the 10 years ended Dec. 31 2024 (“investor return”). Sound all right? Well, that’s about 1.2 percentage points per year less than these funds’ 8.2% aggregate annual total return over that time, assuming an initial lump-sum purchase.

In practice, that 1.2 percentage point investor return gap, which is explained by the timing and magnitude of investors’ purchases and sales of fund shares during the 10-year period, is equivalent to around 15% of the funds’ aggregate total return. Which is to say, it’s a gap that most investors would prefer to pocket rather than sacrifice. The table below shows what this looks like by category group.

How do you mitigate this gap?

Put that way, the prospect of the investor return gap is a scary one. But understanding how short-term or panicked moves can set you back is also a useful tool for ensuring that a long-term view is crucial to financial wellbeing. Familiarity with the inevitable fluctuations of markets is also something that can alleviate stress when these conditions occur. Morningstar’s portfolios are constructed to withstand tricky market conditions that prompt these sorts of loss-aversion behaviours, providing a margin of safety. By sticking to your plan, staying invested, and having your money compound, you’re already well on your way to minimising the effects of the investor return gap.

If you have any more questions about how your Morningstar portfolio is positioned, or if you’d like to walk through some common behavioural responses and how to alleviate them, I’m always happy to talk. I look forward to chatting soon.

Regards,

Adviser

Important Information

3 factors that enable financial advisers to improve returns by 3%

An understanding of how advisers add value allows self-directed investors to set themselves up for success.

By Shani Jayamanne, Senior Investment Specialist

Vanguard’s report ‘Adviser’s Alpha’ looks at how much value financial advice can add to investment returns. The report concludes that financial advice improved net returns by 3% for investors.

The report outlines specific areas where advisers are adding this value including overtrading, a tailored plan and technology, tools and knowledge. They serve as pertinent lessons that self-directed investors can take to improve their financial outcomes.

Overtrading

The report calls out the period between February and April 2020 to demonstrate how advisers can add value as a behavioural coach. It quotes statistics from ASIC that showed 5,000 accounts were being opened daily during this period. These new investors only held onto their securities for an average of one day. It wasn’t much better outside of this period. A year prior, it was 4.5 days on average. 80% of these new investors made losses.

Financial advisers can add value as behavioural coaches and stewards of their clients’ investment goals.

Those that sold during March 2020 sold at the bottom of the market. As we all know, markets have recently set record highs—doing more than recovering those losses.

How self-directed investors can prevent overtrading

Overtrading and overconfidence comes from seeking wealth maximisation. That is a focus on maximising your money instead of having a clear goal in mind and working towards that goal.

An investment policy question connects your goals to the actual investments. In addition to specifying your goals, priorities and investment preferences, a well-conceived IPS ensures that you have a set review process that enables you to stay focused on the long-term objectives. This way, you can ignore short-term noise and avoid irrational decisions.

There are six steps to an Investment Policy Statement:

Step 1: Document your goals

Documenting your goals might seem straightforward, but there’s more to this than meets the eye. Quantifying and prioritising your goals is paramount. If you do not quantify, you cannot measure success, and if you do not prioritise, you risk letting a lack of focus hinder you from achieving any goals.

Step 2: Outline your investment strategy

The most successful investment strategies are straight-forward and succinct. For instance, a strategy for those embarking on their investment journey may be as follows: ‘To invest primarily in low-cost passive investments, increasing contributions along with salary increases. Begin with 80% in aggressive assets, and transition to 50% in aggressive assets by retirement’.

An investment strategy for retirees might be: ‘To invest in dividend-paying equities and annuities to deliver a baseline of income; regularly rebalance to provide additional living expenses. Target a 50% defensive/50% aggressive mix.’

Step 3: Document current investments

The next step is document all of your current investments with their recent values.

Step 4: Document target asset allocation

Asset allocation is larger driver of returns than security selection. It is important to align your asset allocation to the goals you hope to achieve.

Remember that assets change in value. Your target asset allocations may be better expressed as ranges instead of a set figure to avoid over-rebalancing and incurring transaction costs. For example, you might have an 80% allocation towards equities, but on any given day that 80% could shift to 75% or 85% of your portfolio. Instead of 80%, express your equities asset allocation as 75%-85%. For major asset classes, stick to a range between 5-10%.

Step 5: Outline investment selection criteria

In your Investment Policy Statement, you must outline your investment selection criteria that will provide guidelines for the types of investments that you want to hold.

For example, if you use Morningstar’s research in your investment decision-making process, you could specify that your equity holdings must have at least 3 stars, or your mutual funds must all be rated Bronze or better. Defining criteria for selecting investing will keep you accountable and focused on what matters.

Step 6: Specify monitoring parameters

Implicit in defining an investment policy statement —from asset allocation to investment-holding specifics—is that you’ll periodically check in on your portfolio to ensure it is still on track to reach your goals.

In this section, you will specify how often you will review your portfolio. Understand yourself, and what works for you—if checking too often will cause poor investor behaviour (such as panic buying or selling), set a less frequent period for review.

This is the crucial last step to avoiding over-trading. It outlines the reasons in which you will buy or sell assets in your portfolio, and at what intervals. You may also buy and sell assets if current holdings do not meet your investment selection criteria anymore.

A portfolio tailored to suit your needs

Your portfolio should be reflective of your own goals. The value that a financial adviser provides is tailoring your investments to you as an individual or family. Financial plans, are by regulation, created in an investor’s best interests by financial advisers.

This can be done by a self-directed investor and requires an investment of time. Many articles, including this one, are general in nature. I write about how a particular stock ticks all of our analysts’ boxes, but it is up to a self-directed investor to decide whether it is in line with what they are trying to achieve. General advice and information do not account for your personal circumstances and requires work from a self-directed investor.

Financial advisers do this work for you.

How self-directed investors can tailor a portfolio to suit their needs

Morningstar is a proponent of goals-based investing. The four steps to construct a goals-based portfolio are:

Define your goals
Calculate your required rate of return
Asset Allocation
Select your investments

Resisting the temptation to chase a popular or well performing investment that doesn’t align to your goals is challenging. Knowing how your investments are connected to your goals helps to limit poor decisions when emotions are heightened during periods market volatility. An investment in your own education is also needed to understand the foundations of investing and the attributes of individual investments.

Technology tools and knowledge

One of the largest benefits that financial advisers offer is the access to financial technology and tools that can model financial scenarios. These tools allow them to easily determine the best path forward for their clients in a scalable manner. They can model out withdrawal rates, portfolio projections and age pensions. They can then adjust the variables to ensure that they are accounting for a variety of scenarios that may alter the outcomes of the client.

These tools can often be tens of thousands of dollars a year in subscription costs which the adviser can justify as they are using these tools across their entire client base. These tools aren’t as accessible for individual investors.

However, individual investors do not need to worry about a suite of clients. They only need to worry about themselves. They do not need scalable solutions because there is no scale. There are many tools available to retail investors that can help them manage their portfolio. Even without these tools, a spreadsheet can do some of the heavy lifting when it comes to the math behind an investors’ portfolio. For example, my colleague Mark LaMonica has recently put together a spreadsheet that helps to calculate the roadmap to generating $100,000 in passive income.

These tools give advisers an edge in terms of efficiency when putting together portfolios, but that is not to say that self-directed investors do not have edges themselves.

For example, Approved Product Lists. To operate as a financial adviser in Australia, you must be authorised under an Australian Financial Services Licence (AFSL). Some AFSL holders only allow their representatives to invest in a select range of products that fit a set of internally established criteria—limiting the securities an adviser can recommend. As a self-directed investor, you are able to invest in the securities that are best suited to you, without restriction.

I’ve outlined some free tools here for when you are just starting to invest. There are also a multitude of tools on Moneysmart and Noel Whittaker’s website for those that are further along in their journey.

Final thoughts

Ultimately, an adviser’s job is to know what is best for their clients. Their job is to help you reach your financial goals, which involves meeting and maintaining qualification standards. Most self-directed investors are not full-time investors. They are establishing and maintaining their portfolios to reach their financial goals outside of their day jobs. It is hard work.

Self-directed investors may not have the same time to dedicate to learning and understanding the depths of the many aspects of personal finance—tax, estate planning, investments, structuring of assets. Financial advisers usually have a suite of trusted professionals that they team up with to manage these aspects holistically. In the same breath, self-directed investors are not usually fully self-directed. They will outsource some of these aspects to professionals—commonly estate planning or tax.

So, the question is—does the fact that you are able to recreate these advantages mean that you should not get a financial adviser?

Just like many aspects of personal finance it depends on your circumstances. Some individuals have no interest in managing their financial affairs and would rather outsource to a financial adviser. Others will decide that they do not have the aptitude or time to learn. Some are not in the position to afford the financial advice fees.

A large part of the excess returns a financial adviser provides is acting as a behavioural coach and ensuring that their clients make decisions that are in their best interests. More than anything this is a result of the structure provided by the financial advice process.

Some individuals will determine that they are not able to do that without a third party. Some will put the work in to learn about investing and set themselves up for success. Many people will continue to achieve poor outcomes by not bothering to define their goals and put an investment strategy into place and will haphazardly chase strong performing investments. A self-directed investor can achieve great results. It just requires work—and a willingness to do it.

Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg. Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.

Why getting financial advice is more of an emotional decision than financial

Originally published in FT Adviser, this article was written by Morningstar’s Global Head of Decision Sciences, Ryan O. Murphy.

Clients may not be aware of behavioural science or coaching, but it forms much of what they seek from financial advice and planning. Emotional factors play a greater role in the decision to hire an adviser than practical ones, and continue to play an essential part throughout the relationship.

Used in the right way behavioural science can enhance the value consumers derive from the advice relationship. The actions and principles involved are simple and fit naturally into adviser-client conversations.

Here we explore some of the vital roles behavioural science can play throughout the advice relationship, based on Morningstar Wealth’s long running research. This ranges from why consumers choose to work with an adviser in the first place, to why they remain with them, and how to understand not only the ‘what’ of client goals, but also the ‘why’.

The value and benefits of behavioural coaching: The emotional and financial benefits such as greater trust and engagement with long-term plans.
Identify meaningful client goals: How behavioural nudges can help clients understand, agree and stick with goals that flex with their lives over time for positive outcomes.
Protect the adviser/client relationship: How to identify and avoid seemingly small issues that can have a negative impact on both client relationships and the advice business.

It is likely that many, if not most, advisers will recognise aspects of behavioural science in their own practice. By making greater use of these and perhaps adding some structure, the positive effects for clients and business alike can be amplified.

Value and benefits of behavioural coaching

Behavioural coaching is about providing support to help clients act in their own best interests: sticking to their financial plan and making the right decisions in any financial situation. Even more important is not making wrong decisions that could prove to be damaging.

Most clients will not be aware of behavioural coaching and will simply regard it as a normal part of the advice relationship. They will not ask for it but that does not detract from the very real benefits.

Hiring a financial adviser is as much an emotional decision as a practical one. In fact, according to our research, emotional factors account for 60 per cent of decisions and financial factors 40 per cent.

This trend persists throughout the advice relationship. While financial results are clearly important, they are not the only consideration in continuing to work with an adviser.

Financial advice is underpinned by emotional factors, whether or not clients are aware of this, but tact and subtlety are essential. For example, phrases such as, ‘Helps me stay in control of my emotions’, provoked a very negative response while, ‘Helps me make financial decisions with a cool head’, scored better.

Returns are clearly important, but they are not the only factor when it comes to clients continuing their financial advice relationship. We asked advised clients to list reasons why they stay with their adviser, categorising responses across both emotional and financial factors.

The top three reasons were:

Discomfort handling financial issues: From the peace of mind that comes with working with an adviser, to avoiding managing financial issues or negative emotions when doing so.
Quality of financial advice and services: Good advice was perceived, among other things, as offering personalised services or helping clients consider options that may benefit them.
Behavioural coaching: Not articulated as such but rather helping them stay on track, providing a second opinion when needed and generally managing potentially damaging behaviour.

Trust is the basis of all good advice relationships and emotional factors play an important role here too. The top three ranked behaviours for building trust were:

‘when my adviser acts in my best interests’;
‘when I see my adviser is knowledgeable’; and
‘when I believe my adviser understands my financial goals’.

Acting in a client’s best interests can often involve making sure they do not make bad decisions. Market turbulence is a classic example. It is a normal part of investing, which they will very likely experience. Resetting client expectations in this way — and educating them on the inevitability of volatility — can help remove the fear that can in turn trigger a flight to cash in difficult times.

There is also a quantifiable advantage to clients who make more intelligent financial planning decisions. We describe this as ‘advice gamma’ and it is made up of factors including cost-effective implementation, tax management, rebalancing and taking an income in retirement.

Identify meaningful client goals

‘What is your goal?’ can be a very hard question to answer, and people often do not know or understand their financial aspirations. Simple behavioural nudges can help clients articulate their deeper goals, which are both important and achievable.

To help with this we have defined two levels of goals:

Surface goals: typical financial goals such as saving for retirement.
Deeper goals: the motivation, meeting core values and the need to lead a full life.

Deeper goals tend to be more abstract and flexible, better suited to long-term planning where circumstances and priorities change. Truly understanding client goals and what they mean helps adapt them while keeping them relevant.

A simple behavioural nudge can ease clients from one to the other, as our research found. We asked advised clients to list their goals; the result of which consisted of their surface goals.

Showing them a list of common financial goals, such as ‘stop working and do something I love’ and ‘feel secure about my finances in retirement’, before asking them to then list their goals again led to around 75 per cent changing at least one of their top three. These final goals were more personal, detailed and based around what would make them happy.

A common behavioural bias when it comes to setting goals is reflecting current top-of-mind priorities (that is, the availability heuristic) rather than those more deep-rooted ambitions.

Language and framing questions can help here, shifting the focus from the ‘what’, which tends to be more about the here and now, to the ‘why’, thinking in more abstract terms about the future. We know from our work with advised clients that those who are more future focused are generally more motivated and effective when it comes to achieving their goals.

Shedding jargon also plays a key role. For example, research finds investors were more enthusiastic about ‘a guaranteed income for life’ rather than ‘an annuity’. It is much clearer from the description how it benefits the client.

Framing questions effectively can also be beneficial. Careful listening will help you see where clients are basing their goals on their immediate concerns rather than longer-term priorities. You can then tailor questions that prompt them to consider the future.

Helping clients understand the emotional aspect of their goals can bridge the gap from surface to deeper goals. In another study we asked clients to list their goals. We then introduced a positive psychology framework, explaining that their goals would fall into six categories: positive emotion, engagement, relationships, meaning, accomplishment and vitality. When the clients then added any additional goals, we saw a real shift from surface to deeper, thanks to this additional insight.

Goals are integral to the financial planning process, providing structure, purpose and an eventual measure of success. The more meaningful the goals, the clearer the path to good outcomes.

Protect the adviser-client relationship

While it is rare for a client to part from their adviser, an unhappy client who becomes disengaged from the advice relationship can be just as much of a loss, if not more so.

This can be seen across four key measures:

trust in the adviser;
continuing to place money;
continuing to work actively with the firm;
recommending the adviser to others.

They may be using firm resources but are no longer contributing to the relationship and will not help grow the business.

Avoiding this outcome involves being aware of seemingly small annoyances that can have a disproportionate impact on clients and the relationship. Our research in this area focused on a list of 15 micro behaviours such as, ‘My adviser took more than a week to get tasks done’, and, ‘My adviser used financial jargon I did not understand’.

We mapped how often those behaviours occurred and how clients felt about them (positive, neutral or negative).

Each behaviour clients dislike had a moderate negative impact on the advice relationship. The greater the dislike the greater the impact across the four measures. Frequency, however, seems to make less of a difference. Using jargon once can be as damaging as using it at every meeting.

Jargon can be particularly damaging to relationships. Not only does it quickly turn clients off, it is also significantly erodes trust. It is a blocker to effective communication, leaving clients frustrated and suspicious.

Communication is also crucial when it comes to setting expectations. For example, a week is not a long time to complete a task in financial services, but if clients do not understand this then dissatisfaction will creep in as they feel let down.

Taking time to understand how clients feel can prevent these seemingly small issues from becoming major problems. Face-to-face may feel awkward but a post-meeting follow-up survey can help. If it is anonymous clients may be more likely to raise issues they would not be comfortable discussing.

It can also be helpful to have a checklist to look over before meetings, as a refresher, or afterwards, to reflect on any possible slips and be aware for future meetings)

AI and its potential impact on client relationships is a current concern. Our research has found that clients are positive about generative AI in certain circumstances. It must be used to free up adviser time, which can then be used to the client’s benefit — administration, research or generic marketing material, for instance.

Activities with a clear human connection — personalised recommendations or emails — but which turn out to be AI generated can be deeply damaging. Used well, and openly, GenAI can free up time for the behavioural coaching activities that are so highly valued.

These small steps can help to keep clients more engaged and the relationship mutually rewarding.

Future focus

Goal-based financial planning is about looking forward to achieving goals, not back on market performance. As we have seen, meaningful goals are based on personal happiness and financial comfort, not beating a benchmark.

Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg. Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.

Morningstar Investment Management Australia recognised at Financial Newswire Fund Manager of the Year Awards 2025

Morningstar Investment Management has been recognised at the Financial Newswire Fund Manager of the Year Awards. This recognition is a reflection of the expertise, discipline, and collaboration that underpin everything we do. A special congratulations to our CIO Matt Wacher, CAIA, Senior Portfolio Managers, Bryce Anderson, CFA, and Bianca Rose, for their outstanding leadership, and to George Antonas, who leads our Investment Operations with precision and commitment.

The awards included:
– Winner – Managed Accounts Manager of 2025
– Winner – Multi-Sector Growth: Morningstar Multi-Asset Real Return Fund
– Highly Commended – Multi-Sector Growth SMA: Morningstar Growth Managed Account
– Runner-up for the Overall Fund Manager of the Year

Morningstar Investment Management was also nominated for Australian Equities Large Cap (Morningstar Australian Shares Fund).

Awards like this highlight not only individual excellence but also the strength of our collective approach to delivering on behalf of investors.

(From L to R: Noah Kaplan, Bianca Rose, Matt Wacher and Bryce Anderson)

For more details, refer to Financial Newswire.

Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg. Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.

Adviser-to-client template: A mid-year recap

For financial advisers to use with clients.

Dear Client,

As we move through the second half of the year, we’d like to recap what’s happened so far in 2025, and how your portfolios are positioned for the coming months and years.

Much of the market noise this year has centered around volatility, with U.S. President Trump’s tariff measures kicking off waves of turbulence and, at times, sharp market corrections.

But despite that, it’s been a strong year for equities and bonds. Australian equities are up around 8%, with small caps rebounding after underperformance. Globally, we’ve seen strong results out of Europe, while China and emerging markets have had a mixed response, though the reactions to ongoing tariff announcements have muted somewhat. The U.S., on the other hand, has lagged. April was an interesting turning point, with a sharp sell-off followed by a V-shaped recovery.

A new lease on life for the bond market

Over the past seven months, bond returns have sat around the 3.5%-4.5% range, proving more attractive now than they have been for the last 15 years in the aftermath of the GFC. This also means that government bonds are again offering diversification benefits.

A macro view of Australia and the U.S.

Domestically, growth has been weak, and you’ve likely heard that inflation has steadied, with the Reserve Bank of Australia cutting rates this month for the third time since the rate-hiking cycle began and more being anticipated. Unemployment remains low, and while this stability brings reassurance to many Australians, our investment manager Morningstar cautions that there are still some risks to hedge against, including tariffs, geopolitical tensions, and global slowdowns. Overseas, U.S. CPI data is showing similar inflation to Australia, though the future threat of tariffs may see these numbers climb. And, in a move set to mirror many regions, the U.S. Federal Reserve is also expected to cut rates 2-3 times to encourage growth as unemployment edges higher.

Where is Morningstar seeing opportunities?

So what does this mean in practice? Morningstar are seeing pockets of valuation opportunity in emerging markets (Brazil, China, Mexico), which are offering stronger long-term return potential than developed markets. Conversely, at home, Australian banks have seen strong price gains, which leaves less room for future returns. Morningstar has also identified opportunities in some unloved sectors such as US healthcare and consumer staples.

AI is a long-term theme, but at this stage, valuations are high for the bigger tech companies (Microsoft, Meta and Alphabet). Similarly, there are risks in the supply cycle, such as chip demand, which are making AI less attractive at this point.

Conclusion

As always, Morningstar is taking a long-term view with a strong focus on risk management. They continue to focus on valuations as a guiding principle throughout the volatility, allowing them to build and execute robust portfolios. Diversification, discipline and investor behaviour remain key to navigating uncertainty and staying on track.

If you have any questions about this wrap-up or about your portfolio, please get in touch. I look forward to speaking with you.

Signoff

Important Information

Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg. Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.

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