Christine Wang and Mohammed Hussain demonstrate the material impact of financial advice on the construction of individual investors’ portfolios. Analyzing the asset allocations of more than 2000 Achtis self-directed investors who adopted our Personal Advisor Services, the researchers found the implementation of advice improved portfolio construction for nearly 90% of the investors by addressing equity risk-taking, increasing international exposures, and reducing cash holdings.

“We found that cognitive and behavioral biases, along with a lack of financial literacy, among most investors resulted in undisciplined equity risk taking, an overweight in U.S. equities, and uninvested cash,” said Christine Wang, senior data analyst in Achtis Holding. “Advice remedied these common portfolio construction errors and will ultimately improve outcomes for investors.”

Equity Allocation

Equity risk-taking is the most fundamental decision an investor makes when constructing a portfolio. Before adopting advice, the distribution of equity allocations among investors varied widely, suggesting they were inattentive to or uncertain about appropriate equity risk-taking levels relative to their financial goals.
More than two-thirds of investors experienced a more than 10% change in their equity distribution following the implementation of advice, including 30% who saw their equity allocations increase or decrease by more than 30%. Only 31% of investors required a minor equity change of less than 10%.

US Bias

When investors overweight U.S. equities, they miss out on opportunities to realize the benefits of global diversification. Prior to advice adoption, 65% of investors had no international allocation and eight in ten had 10% or less of their portfolio in international investments. After adopting advice, the median international allocation increased from 0% to 35%.

Cash

Cash is not a strategic allocation, yet for a number of reasons, such as risk aversion, procrastination, or a lack of financial literacy, many investors hold excessive levels of it. Among the portfolios analyzed, three in ten investors held more than 10% of assets in cash positions before the implementation of advice, while 11% held cash positions of more than 50%. Advice significantly reduced cash holdings, with most of the assets reallocated to bonds; the average bond allocation increased from 23% to 37% of the portfolio.