As investment becomes ever more automated and passive investment orientated, the irony is that the need for an independent financial adviser (IFA) in one’s corner becomes ever more necessary, said Johann Erasmus, head of index funds, Standard Bank. He was speaking at one of the Business Day | Financial Mail Investment Dialogue, exploring the relevance and power of index investing and the changing role of IFAs.

Delegates heard that behavioural investing – through a combination of irrational decision-making amplified by automated processes and machine learning – mean the average investor needs the validation of investment decisions by a professional in his/her corner.

Designed to address some of these inherent challenges, Wehmeyer Ferreira, 1nvest Executive announced the establishment of a specialist passive investment house, 1nvest, as a joint venture between Standard Bank, Liberty and STANLIB. This was premised on the fact of investor decision-paralysis and aimed to simplify the passive market: it would jointly house the 28 products in the group: both ETFs and unit trusts ranging from balanced funds to ‘intelligent’ beta funds. “The reason for the merger is to create a focused passive house, something much needed considering the world is moving towards index-tracking funds” said Ferreira.

A succeeding panel discussion involving Nerina Visser (EFT strategist & adviser); Mickey Gambale (CEO, INN8); 1nvest Executive Johann Erasmus; and Adam Gottlich, head of behavioural science at Standard Bank Wealth took place. It looked at how IFAs can best advise ‘irrational’ clients who have access to unlimited data.

The panel discussion topic was the ‘Changing Role of the Professional Financial Advisor’ including behavioural economics, the effects of psychological, emotional, cultural and social factors on economic decisions and how social media and behaviour has impacted on the investment world.

Automation tends to make investors myopic, and prone to herd instinct. Introducing the panel topic, Gottlich, shared insights on ‘Irrationality and Decision Making’.

He said that IFAs need “to understand people as they are, not as they think they are”. “The vast number of decisions we
have to make daily results in decision fatigue, which is why we dip mentally in afternoons. Research by one financial institution had found that people take less than a second to decide on important investments of R10 000 or more. The contradiction is that as humans, we love to make choices but with excessive options available suffer from choice paralysis – it is proven that three to five options is the ‘sweet spot’.

“The herd instinct implies that what everyone else is doing must be the right thing to do. To assist clients, IFAs need to get clients to align themselves with ‘best’ advice rather than everyone around them. The way to handle this is to tell ‘investment stories’ rather than get bogged down in complex return data.

There was tendency to view the passive market as the ETF market, but Erasmus pointed out that by including the passive components of actively managed funds, the total passive aggregate was three to four times that.

Gambale noted: “The beauty of technology for IFAs is that it enables the market to move from a one-size-fits-all approach to one of open architecture – without adding costs.”

There was tendency to view the passive market as the ETF market, but Erasmus pointed out that by including the passive components of actively managed funds, the total passive aggregate was three to four times that.

Visser suggested: “‘Passive’ doesn’t really exist – every choice of an asset or ETF is an active decision, that IFAs need to advise clients on.”

“That’s actually what 1nvest is about – providing all the building blocks as efficiently as possible,” said Erasmus.