The increased conversation around cryptocurrencies and the pressure an advisor might face from clients interested in investing in speculative assets led me to explore the potential impact of regret, or more colloquially the “fear of missing out” (FOMO) on optimal portfolio allocations. Regret is not generally considered when building portfolios, but it has the potential to impact how a client feels about the performance of a portfolio over time (i.e., ex-post). The initial research provided a framework for allocating to more speculative assets, but clearly suggests that moderation is key.
To better understand how financial advisors consider regret when building portfolios for clients and managing client relationships, PGIM DC Solutions recently conducted a survey of 209 financial advisors between July 10 to July 14, 2023, which found that while advisors aren’t actively considering regret, it’s not necessarily costing them clients (at least that they know about!). The results also suggest a potential opportunity for future client resources to provide more education around speculative assets.
Advisors Not Considering Regret Aversion (Yet)
As demonstrated in the chart below, the survey results suggested that most advisors don’t actively incorporate regret when building portfolios, with only 33% indicating doing so occasionally or frequently. In addition, most financial advisors don’t believe they are losing clients who want to invest in more speculative assets, with only 7% saying they lost clients occasionally or frequently because of this. In other words, regret is something that financial advisors don’t tend to worry about.
Advisors Are Fans Of Limiting Speculative Assets, Like Crypto
There was a clear desire to limit allocations to more speculative assets as part of a client’s overall financial wealth. Advisors were asked the maximum percentage of client’s total investible assets they’d feel comfortable allocating to speculative assets in two ways, one focusing on any speculative asset (which included “cryptocurrencies” as an example) as well as one question that just focused on employer stock. The results, as noted in the following chart, suggest financial advisors clearly try to limit allocations, but they target significantly lower allocations for speculative assets more generally (e.g., cryptocurrencies) versus employer stock, where maximum allocations were clearly higher.
Resources Needed To Support Speculative Asset Allocation
Finally, I was interested in how financial advisors deal with and manage clients who want to invest in speculative assets. Only 27% of respondents said they had a process in place or materials for clients interested in investing in speculative assets. This suggests a potential opportunity for someone to create resources for advisors to use in the future. Additionally, there appeared to be a lack of consensus on how financial advisors manage client requests, where 19% let clients figure it out on their own, 37% provide basic information, and 39% manage it as they would other client requests.
While FOMO has always been an issue for investors (think tulips!), I’m worried it’s going to be a bigger issue in the future as we all become increasingly interconnected. Everyone is different; therefore, how to deal with regret is likely to vary materially by client. However, I think the key is not pretending regret doesn’t exist. Actively managing it, either through education or investing some portion of the portfolio in those assets, is likely to result in a “stickier” client that is more likely to accomplish their financial goals.
David Blanchett is head of retirement research at PGIM DC Solutions.