How to coach investors through choice overload

By Samantha Lamas, Senior Behavioural Researcher

Investors face more opportunities than ever in the investing space with information at their fingertips and the tools to put new ideas into action just a few taps away. However, having more choices, and more ownership over those choices, doesn’t always translate to better decisions.

In some ways, investors may feel besieged by the countless sources of information and tools they have at their disposal, all of which are competing for their attention (and money).

If people manage to sift through the information thrown at them from sources like news outlets, friends and family, robo-advice, and others, then they still have to decipher industry jargon and review a range of increasingly complex investment products. Altogether, the endless tools and sources of information available to investors may complicate their decisions instead of simplifying them.

What Choice Overload Can Mean for Investor Behavior

All these factors may prompt some investors to fall prey to choice overload, a bias caused by being overwhelmed with too many options. As a result of this bias, investors may fall into a few decision-making traps:

  • Inertia: They choose to avoid making a decision altogether and do nothing.
  • Naive diversification: They choose to pick a little bit of everything. In portfolio decisions, this can prompt investors to spread their assets among all the investment options available to them, regardless of their goal asset allocation or cost.
  • Opting for attention-grabbing investments: They choose investments they recently saw on the news or other media channels.

When it comes to finances, these shortcuts can become disastrous mistakes—leading some investors to put off making important financial decisions or overspend on investment options.

Guiding Investors Through the Choice Jungle

How can advisors help investors cope with all the noise? For that, we can turn to research-backed decision strategies:

  • Start by limiting the available options. If a client needs to choose a new investment, give them a few top options to choose from instead of the full range of available products. If they want to read about financial topics in their personal time, guide them to a few trusted websites or blogs. This technique is about narrowing down the myriad options available to investors and providing them with a personalized, vetted selection set.
  • Build a structure for the decision-making process. If a client keeps avoiding getting back to you with a decision, help them make an appointment on their calendar when they will make the decision. If a client is tech-savvy and has an online calendar, go the extra step and include a description of the decision in the invite along with any applicable (and vetted) resources the client can use to make an informed decision.
  • Bring it all back to their goals. Sometimes when we are confronted with enticing options and fancy tools, we forget why we started the process in the first place. If a client is tempted to take the shortcut of choosing the attention-grabbing investment, now may be a good time to remind them of their goals and how that investment does or doesn’t line up with them. Maybe the new investment option is popular but also volatile—and not a great way to help them achieve their goal of early retirement, which is only six years out. Helping investors see that disconnect can prompt them to reflect and reconsider and ultimately make decisions that are more appropriate for their unique situation.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.


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