It’s hard to escape financial adverts. The biggest brands seem to get their name all over the place, from the side of taxi cabs to train station billboards. They sponsor arts and sporting events and take out full-page adverts in newspapers and magazines. There’s a reason why banks and fund management companies spend so heavily on advertising: it’s actually very effective. Why? Well, people are naturally anxious about money. Many find the idea of the financial markets quite scary. They’re bombarded with information, not least on social media, and they’re confused by all the different options. So they derive comfort and security from large, familiar brands, and they’re especially receptive to simple marketing messages that help them make decisions. Even if you consider yourself a relatively sophisticated consumer, you may be more susceptible to financial adverts than you think. The reason is that financial advertisers are very clever at exploiting our vulnerabilities and lack of understanding. They also know just the right buttons to press to make us sit up and take notice. But financial adverts can seriously damage your wealth, so you need to stay on your guard. Here are five ways in particular in which financial advertisers seek to influence investors’ decision-making.
How advertisers command attention
1. They build an impression of expertise
Behavioural psychologists refer to the concept of social proof. It’s the idea that, when we feel uncertain, we like to look to others for answers as to how we should think and act. Closely related to this is our tendency to follow the lead of credible experts. So, for example, if we see a certain product or strategy being promoted in the media, we’re inclined to pay attention, even though the people recommending them may have a commercial interest and may not be experts at all. The evidence shows that, once the fees they charge are factored in, the vast majority of fund managers lack the skill to add value for investors, either through stock selection or market timing. Yet the impression their marketing teams convey is that they do have that skill.
2. They emphasise past performance
The advertising of investment products usually focuses on past performance. It highlights perhaps a few years of exceptional returns. Again and again, money flows into funds with good recent returns, and out of funds with poor returns. But past performance tells us little, if anything, about what we can expect in the future. What most investors forget is that, at any one time, there’s a huge range of products to choose from. There are bound to be funds with excellent recent returns. Those are often just the funds which are due for a period of underperformance.
3. They create a sense of urgency
Another way in which financial advertisers lead consumers astray is by creating a false sense of urgency. So, for instance, we might read in the media about a particular investment “opportunity”, perhaps a hot fund or sector, and feel compelled to take action straight away. But that’s very unwise. Of course, the fund or sector in question may indeed go on to outperform, but it could just as easily underperform. Either way, investors are much better off having a long-term perspective, and, instead of taking concentrated bets, holding broadly diversified portfolios. It is very rarely, if ever, the case that you need to make an investment decision without delay.
4. They appeal to our emotions
In an ideal world, investors would act calmly and rationally at all times. We would only make decisions after carefully considering the available information and weighing up our options. But human beings are emotional animals, and financial marketers know this better than most. This is why they deliberately appeal to emotions like fear and greed. Another emotion they exploit is a combination of the two, namely FOMO, or the fear of missing out. It’s only human to have these emotions, and, no matter how rational we like to think we are as investors, every one of us is prone to act on them.
5. They target our behavioural biases
As well as their emotions, investors have to contend with a range of behavioural biases. Again, we all have them to some degree or other, because that’s how our brains have evolved over hundreds of thousands of years. Examples of these biases are herd behaviour (the way we copy what those around us are doing), confirmation bias (our tendency to seek out information that confirms the beliefs we already hold) and recency bias (the way we attach more weight than we should to recent events). Financial advertisers intentionally play on these in-built biases and our inability to identify and counteract them.
What investors can do
So how can investors prevent advertisers affecting their decision-making or derailing their chosen strategy? The first thing is just to become a more discerning consumer of financial adverts. Big brands are very adept at making it seem they have your best interests at heart. But remember that their interests may be completely misaligned with yours. The bottom line is, they want your custom. They want you to use their own products and services rather than anyone else’s — regardless of whether it’s in your best interests to do so. Secondly, bear in mind that it’s highly likely that the most suitable products for you to invest in are not even advertised at all. Most investors should be using broadly passive investments. But fund managers rarely promote these funds for the simple reason that it’s not in their commercial interests, because actively managed funds generate higher fees and are much easier to sell. Thirdly, diversify your sources of information. If you have your interest piqued by an advert for a particular fund, or by an article that appears to recommend a certain strategy, seek out alternative viewpoints. But don’t forget that even those who appear to be experts, including journalists, often have their own conflicts of interest. Also, speak to someone about it whose opinions you respect and who won’t just confirm what you already think. Ultimately, though, the best way to protect yourself from irrational decision-making is to have a financial plan and an adviser to help you stick to that plan and see it through to fruition. This should be someone with a thorough understanding of evidence-based investing and the emotional and behavioural biases that investors are prone to. It should also be an adviser you can trust and who realises that investment products are just a means to an end — a way to help you lead the life you want. Take financial advice from a financial adviser, and never a financial advertiser.
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