Morningstar Magazine - April/May 2018 - 20

Dispatches

Looking Beyond the
Markets New research
initiative focuses on
why investors
succeed-and fail.
BEHAVIORAL INSIGHTS

Stephen Wendel and
Ryun Patterson
This is a special time to be an investor. There
is an ever-increasing array of low-cost investing
options, high-quality data, and a range of vehicles
investors can use to pursue their strategies.
The result is proliferating choice and decreasing
costs. However, there is still significant work
to be done, both in terms of increasing the number
of people who invest and in terms of challenges
current investors face in reaching their goals.
At Morningstar, we're undertaking a new research
project to answer a straightforward, but important
question: What is needed to help investors
succeed beyond good investments? Here's an
overview of our research effort.
Challenges Potential Investors Face

Investing provides the best opportunity for
the public to build long-term wealth by
participating in the economic engine and growth
of society. Yet according to Gallup, only 54%
of Americans invest in stocks in any form. The vast
majority of those who do, do so through 401(k)s
and IRAs, often defaulted in by employers
and owning low balances. Among Vanguard 401(k)
account holders, for example, the median balance
in 2016 was $24,713. Companies' 401(k) default
programs help employees invest, but they
often haven't engendered an active interest in
one's financial future.
In addition to limitations in terms of participation,
investors continue to struggle with other
obstacles. Some of these obstacles are behavioral,
including low savings rates, market-timing,
and selling during downturns. Some of them are

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Morningstar April/May 2018

structural. According to Pew, for example, 52%
of U.S. workers do not have access to an
employer-sponsored retirement plan, and studies
have shown that financial illiteracy is widespread
around the world.
Thus, on one side, we have tremendous
improvements in investments: solid returns, low
costs, and many options. On the other side,
there are two areas where improvements can
be made: 1) helping more people become investors,
if they so choose, and 2) helping investors
reach their financial goals by going beyond the
characteristics of investments available
to them. To help investors succeed, our industry
should be looking at both sides: the investment market (fees, performance, options) and
the investors themselves (who invests
and the behavioral and structural obstacles
impeding success).
Why This Matters for the Industry

In the financial-services industry, we spend a great
deal of time discussing and competing over
the characteristics of financial products: risk/return
profiles, costs, correlation, etc. These factors
are important, and the industry should never stop
seeking to improve the quality of the investments
offered to investors. However, products are
only a small part of the picture for investors and
a small part of what is needed for the financialservices industry itself to prosper.
The real competition for investment products
isn't similar funds. It's credit cards, mortgages,
stagnant real wages, and expenses that
eat away at every dollar of a person's income.
It's fear and distrust of our industry. These
are the things that keep people from investing
in the first place, and among current investors,
they divert money that might otherwise
be invested. To look beyond markets (and the
products our industry offers) is to look at
the tremendous potential for people to become
investors and for current investors to expand
their efforts. The value to investors, and
to the industry, of moving participation in investing
from 54% of Americans to 55% is far greater
than the value of a new exchange-traded fund
with a slightly different asset class tilt than
100 others.

While the potential is there, how to realize
it is unclear. In part, that's because we simply
don't understand enough about the
obstacles that investors face outside the markets.
The solutions to those obstacles are unknown
or complex; for example, it's not obvious
how to best help investors avoid self-destructive
market-timing. To make progress, we need
to better understand both the problems and the
potential solutions.
A Not-So-New Initiative at Morningstar

Morningstar has long been a leader in providing
high-quality data and research about investments,
and that is perhaps what we're best known
for. In addition, for many years we've been tackling
these broader issues of investing. Don Phillips'
powerful voice as a champion of investors is just
one example, and this magazine regularly
publishes "beyond the markets" research pieces.
But our extensive work to help investors more
broadly isn't as well-known as our investmentfocused research.
The Investor Success Project aims to change
this. Morningstar's mission is to create great
products that help investors reach their financial
goals. Toward that end, we're building on
our existing research on investor success and
looking for gaps: unanswered questions
that can help investors and the professionals who
serve them succeed. The Investor Success
Project will help answer these questions. Our
research will focus on investors-who they
are, what their goals are, and how the advisors
and asset managers that serve them can
make the most impact in helping them reach their
goals. We don't know what we'll find, but
we'll share everything we learn-in the magazine,
on Morningstar's blog (http://www.morningstar.
com/blog), and on Morningstar.com. We are
committed to this research, sharing it, and
integrating the lessons into our products. We look
forward to the dialogue with you. K
Stephen Wendel, Ph.D., is head of behavioral science
with Morningstar.
Ryun Patterson is a principal content designer
with Morningstar.
http://www.morningstar.com/blog http://www.morningstar.com/blog http://www.Morningstar.com
Table of Contents for the Digital Edition of Morningstar Magazine - April/May 2018
