An experienced financial advisor whose opinion I deeply respect once made a startling remark:
“You do realise that we cannot advise people on how to manage their investments?”

At first, I struggled with the idea. It felt too cynical and defeatist. But the more I examined the data, the harder it became to refute. The evidence is clear and consistent: the biggest gap in investing is not due to a lack of knowledge or access to information—it’s behavioural.

Over the past few decades, research from institutions like Dalbar and Morningstar has consistently shown that the average investor underperforms the very funds they are invested in. This persistent underperformance is not caused by bad products or flawed strategies. It stems from reactive behaviour: panic selling, performance chasing and poor timing. In technical terms, it’s what’s known as “behavioural negative alpha.”

In other words, most portfolios don’t fail because of poor construction. They fail because the investor abandons the plan at the wrong time. When real money and emotion collide, even the best-laid strategies are often overridden by fear, greed and doubt.

Many investors assume that if they just had better data or sharper insights, they would make better decisions. But that’s rarely the case. Study after study confirms the same uncomfortable truth: investors don’t get the returns of the markets or the funds they are in. They get the returns of their own behaviour.

That gap is costly and persistently so.

The Momentum Sci-Fi Report: Local Evidence of a Global Pattern

Closer to home, the Momentum Investments Sci-Fi Report (The Behavioural Science of South African Financial Decisions) offers a detailed view of actual investor behaviour on the Momentum Wealth platform.

The 2024 report revealed that discretionary investors experienced a “behaviour tax” of -3.53% due to poor timing and switching decisions. The only variable that consistently explains this is investor behaviour. Investors consistently respond to recent market moves and short-term fund performance. And year after year, these reactions work against them.

In a recent article, Paul Nixon, editor of the Sci-Fi report, highlighted how the “Liberation Day” tariff tantrum sparked a spike in panic-driven trades. Investors increased their switching activity dramatically, pushing the behaviour tax to over -8.4% in 2025. That’s value destroyed not by market downturns but by poor human response to them.

The Sad Reality: Even Advised Clients Are Affected

What’s even more concerning is that the vast majority of investors on the Momentum platform are advised clients. These individuals work with financial professionals. They have plans. They have strategies. Yet when emotions run high, they abandon those plans just like unadvised investors.

Why?

Because advisors themselves are not immune. The same behavioural biases that lead clients astray (loss aversion, recency bias, herd mentality) can influence advisors too. Many advisors subconsciously mirror their clients’ emotions, trying to offer comfort or maintain rapport, even if it means compromising long-term results.

The behavioural gap exists not only between what clients know and do, but between what advisors say and enable.

Bridging the Gap

The real job of a great financial advisor is not to predict the next market movement or to pick the top-performing fund. It’s to help clients stick with what matters most to them, which is achieving their long-term objective. This is especially true when their emotional instincts scream otherwise.

No one knows where the market is headed. But we do know how humans tend to respond. And we know the long-term cost of those responses.

Behavioural alpha, the ability to close the gap between potential and actual outcomes, may be the most valuable contribution any advisor can make. Helping clients stay the course, think long-term and act on principle rather than pressure. This is not just part of the job—it is the job.

That’s where real and consistent alpha lives.

 

The above article was written by Marius Kilian.

 

Source

* “Lessons from ‘Liberation Day’ jitters for advisers and their clients”, Paul Nixon, citywire.com/za, 12 Jun 2025

* “2024 Sci-Fi Report – The behavioural Science of South African Investors, Momentum Investments”