Investors Not Acting in Their Own Best Interest


Investors Not Acting in Their Own Best Interest

Study from State Street's Center for Applied Research Highlights How Investor Behavior is Reshaping Investment Management

  • Most retail investors believe preparing for retirement requires aggressive investing, yet 31 percent of their assets are in cash

  • Institutional investors struggle with complexity associated with alternative investing, yet their appetite for these strategies shows no signs of abating

  • Study calls for a new definition of performance to deliver sustainable returns; one size no longer fits all

BOSTON--(BUSINESS WIRE)-- In an investment environment of heightened uncertainty, retail and institutional investors are exhibiting behavior that appears to be at odds with their investment goals, according to the inaugural global investor study by the State Street Center for Applied Research, entitled: The Influential Investor: How Investor Behavior is Redefining Performance.

The study, conducted by the Center for Applied Research, an independent think tank residing at State Street Corporation (NYS: STT) , was based on 12 months of research and input from more than 3,300 investment management industry participants. Among the study's primary findings is that, investors aren't acting in their best interests as they are becoming more aware of economic instability and misaligned interests amongst investment providers, government and markets. As a result, their investment decisions don't always align with their stated goals and there is ample aggregate evidence of this behavior. For example:

  • Institutional investors are faced with challenges in navigating the complexity of certain asset classes. Low-yield markets have increased institutional investors' appetite for alternative strategies. Yet, the majority admits their greatest challenge is not having a deep enough understanding of these assets.

  • Retail investors' conservative strategies are cracking their retirement nest eggs. When retail investors were asked what steps needed to be taken over the next ten years to retire, the majority said to invest more aggressively, yet cash is their number one allocation now and is expected to remain number one over the next decade.

Commenting on the drivers of behavior and goals of both investor groups, Kelly McKenna, global head of the State Street Center for Applied Research said: "While investors have never been as aware of their micro and macro environments, they are exhibiting behaviors that are divorced from their stated investment objectives."

Against this backdrop of investor disconnect between behavior and goals, the study found that investors identified performance as the most important metric for determining the value of their investment providers as well as the greatest weakness of their investment providers.

Accordingly, the study revealed that when it comes to performance, one size no longer fits all. "Current monolithic benchmarks based on relative performance to peer groups or indices serve the provider," said Suzanne Duncan, global head of research for the Center for Applied Research. "The investor's view of value is now more complex and reflects his/her own personal blend of strategies and objectives. In today's investment reality, the investor is the benchmark when it comes to defining performance."

Based on these findings, the Center for Applied Research advocates for fully transparent performance models that focus on long-term sustainability of returns, defined in terms of value to the investor. Over time, this new model for success will help to reduce barriers to healthy decision-making and will lead to improved performance.

The study also found that investors' seemingly irrational behavior is actually a rational response to a number of factors impacting the current global investment environment:

  • Major economic trends, including a steady increase of national debt worldwide, tighter correlations across global markets, and a rise in systemic risk;

  • Mistrust of their primary investment provider to act in their best interest, stemming in part from lack of value delivered versus fees charged. Only one-third of investors believe their primary investment provider is acting in their best interest; and

  • Impediments from politics as well as new financial regulation that most investors believe will be ineffective and expensive. Sixty-four percent of investors believe that regulation won't help address current problems and sixty-two percent believe the cost will be passed on to them.

The Center for Applied Research proposes a four-component performance model in which key value drivers become the building blocks for "personal" performance. Two components - alpha seeking/beta generation and downside protection - are related to market forces and are common to most investors. The other two components - liability management and income management - are risk exposures unique to each investor.

McKenna concluded, "While the future of the industry will be determined by the actions investors take, the investment community has clear opportunities to work together to create better solutions for this new economy."

About The Study

The Influential Investor: How Investor Behavior is Redefining Performance is based on input from more than 3,300 investment management industry participants across 68 countries. The State Street Center for Applied Research obtained this input through surveys of 2,725 investors, and 403 investment providers and government officials. Surveys were conducted through an online platform in collaboration with the Economist Intelligence Unit, Scorpio Partnership and TNS Finance Amsterdam. In addition, the Center for Applied Research conducted face-to-face interviews with 200 executives and government officials from around the world to gain qualitative insights for our research. The study is available at

About The Center for Applied Research

The Center for Applied Research (CAR) is an independent think tank comprising a global team of researchers located across the Americas, Europe/Middle East/Africa and Asia Pacific. CAR conducts targeted research designed to provide clients with strategic insights into issues that will shape the future of the investment industry. Building on the success of State Street Corporation's established Vision thought leadership program, CAR brings together resources within the industry and across State Street to produce timely research on the topics that are most important to investors worldwide.

About State Street Corporation

State Street Corporation (NYS: STT) is one of the world's leading providers of financial services to institutional investors including investment servicing, investment management and investment research and trading. With $23.4 trillion in assets under custody and administration and $2.1 trillion in assets under management* at September 30, 2012, State Street operates in 29 countries and more than 100 geographic markets. For more information, visit State Street's web site at

*This AUM includes the assets of the SPDR Gold Trust (approx. $75.3 billion as of September 30, 2012), for which State Street Global Markets, LLC, an affiliate of State Street Global Advisors, serves as the marketing agent.

The views expressed in this material are the views of the State Street Center for Applied Research through the period ended 31 October 2012, and are subject to change based on market and other conditions.


State Street Corporation
Arlene Roberts, 617-664-3933

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