Morningstar Magazine - February/March 2018 - 19

but more importantly, to iteratively improve
it. It sets up a feedback loop: We tried to do X, but
Y happened. What can we do differently
to make sure X happens in the future? From my
experience in the field, many companies have no
rigorous feedback loop like this, even for
business impact, and are flying blind. Having this
feedback loop also means that investor impact
becomes part of the key performance indicators for
the development process, and investor impact
joins business impact as two of the central criteria
for determining what gets built or marketed.
These are some of the major implications;
there are certainly others. For example, companies
should expect to find that certain products
and services work better for some investors than
others, and some do not have their advertised
effect at all. Advisors may find that their
efforts falter because investors don't act on their
advice or follow the agreed-upon plan. To
have impact for investors means more than giving
advice that is theoretically correct but isn't
effective in practice. An impact-centric
segmentation process can arise-targeting people
based on what's impactful for them rather
than just on their age or income-with significant
implications for marketing and business success.
And there are many unanswered questions,
including how to scale up impact assessments
without driving up costs or slowing down
execution time, and how to handle multilevel
environments in which a company's direct
clients are not the end investor. These questions,
and more, are ones our industry needs to
tackle. At Morningstar, we are working to answer
them as we apply this process to our own
work, and we welcome partnership with others
in the field.
An Impact-Focused Industry

The implications of this investor- and impactoriented process are considerable for the
financial-services industry. Here are some of the
issues to address:
Transparency
The creation of a new product-by-product,
service-by-service measurement of impact would
enable new transparency across the industry-

showing what works and what doesn't. This
would naturally be backward-looking, based on
measured actual impact, but it would help
investors better judge the products that best help
them reach their goals. The uncertainties
of the market will never go away, but investors
could better assess, in an apples-to-apples way,
what each product means for them.
Competition
When investors have the information they
need to evaluate products by their impact, that will
naturally change the dynamics of industry
competition. Instead of competing on a product's
features, companies would be increasingly pushed
to compete on actual impact. That is clearly
good for the investor. It also creates a business
opportunity for those companies that can move
and adapt quickly.

to not drive impact for clients and the
end investor.
Trust
With accountability and transparency come
respect and trust. In many segments of American
society, our industry is reviled. There is a
general lack of trust of financial services, which
has not historically been the norm. Through
much of the 1980s, a majority of Americans had
"a great deal of confidence" in banks; now that
figure is 27% (Gallup 2016). We should
acknowledge that that lack of trust has been
well-earned by a variety of bad apples and
by high-profile abuses. By focusing on the needs of
the end investor and showing where industry
efforts are-and are not-beneficial for investors,
we can start to rebuild that trust.
What's Coming Next

Integration
One central behavioral lesson is that often
small details of how a topic is framed or described
can drastically affect people's decisions. For
the financial-services industry, we are increasingly
seeing that the same holds true everywhere,
from how companies talk about retirement savings
to how the decision to sell a stock is presented.
The implication for businesses is that product
design, user interface, marketing, and delivery are
all one integrated package that can influence
outcomes for the individual. A company can (and
should) improve outcomes for investors through
their user interface and marketing, as much as the
financial product itself.
Accountability
Perhaps the most difficult issue for financialservices companies will be the redefining
of accountability. Advisors in the United States are
already facing the implications of being
accountable for serving the best interests of
clients. It's a change that we at Morningstar have
long held to be beneficial for investors and
advisors. An industrywide focus on impact will,
oddly enough, make meeting that standard
easier by facilitating the development of
a single clear metric of best interest. For asset
managers and others in the industry, clear
measurements of impact will necessitate changing
business lines and practices that are shown

Measuring and focusing on the end-of-line impact
we have on investors would have significant
repercussions for financial services and investors
alike. Some companies will not want to make
the change for fear of being unable to compete
when measured by that yardstick. But if investors
are able to see which companies are most
effectively helping them reach their goals, would
we expect them to continue using any other
yardstick? The companies that move quickly will be
the ones to reap the reward. K
Stephen Wendel is head of behavioral science
with Morningstar.
References
Benz, C. 2017. "Passive Investors Aren't That Passive,"
Nov. 25. http://beta.morningstar.com/videos/836693/
passive-investors-arent-that-passive.html
Beshears, J., Choi, J.J., Laibson, D., Madrian, B.C., &
Milkman, K.L. 2015. "The Effect of Providing Peer
Information on Retirement Savings Decisions." The Journal
of Finance, Vol. 70(3), pp. 1161-1201.
Gallup News. 2016. "Americans' Confidence in Banks
Still Languishing Below 30%." June 16. http://news.gallup.
com/poll/192719/americans-confidence-banks-languishingbelow.aspx
Kinnel, R. 2017. "Mind the Gap: Global Investor
Returns Show the Costs of Bad Timing Around the World."
Morningstar Manager Research, May 30.
Wendel, S. forthcoming. "Using a Behavorial Approach to
Mitigate Panic and Improve Investor Outcomes." Journal of
Financial Planning.

global.morningstar.com/Morningstarmagazine

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http://beta.morningstar.com/videos/836693/passive-investors-arent-that-passive.html http://beta.morningstar.com/videos/836693/passive-investors-arent-that-passive.html http://news.gallup.com/poll/192719/americans-confidence-banks-languishing-below.aspx http://news.gallup.com/poll/192719/americans-confidence-banks-languishing-below.aspx http://news.gallup.com/poll/192719/americans-confidence-banks-languishing-below.aspx http://global.morningstar.com/Morningstarmagazine

Table of Contents for the Digital Edition of Morningstar Magazine - February/March 2018

Contents
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