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September 10, 2024

Blog

5 min read

How Can Advisors Help Close the Investor Return Gap?

The persistent 1.1% return gap stems from mistimed purchases and sales.

Key Takeaways

  • Investors had greater success using all-in-one strategies like allocation funds than narrower building blocks such as sector funds.

  • Context and automation made a difference to how much return investors captured.

  • The more volatile a fund's returns, the larger the gaps tended to be.

The gap between the returns investors experienced and reported total returns continues. Morningstar experts estimate the average dollar invested in mutual funds earned a 6.3% per year return over the 10 years ended Dec. 31, 2023. That was 1.1% per year less than the average fund's total return, with that shortfall explained by mistimed purchases and sales.

This presents an opportunity to advisors who can provide guidance to clients to help them capture as much of their fund holdings’ total returns as possible. We offer some thoughts in our latest report on key factors that can help advisors and their clients narrow this gap.

To read the full research report, download a copy.

All-in-One Versus Building Blocks

Allocation funds, which diversify their assets widely across asset classes, boasted the narrowest gap. This finding suggests that investors have had more success using simple funds that automate mundane tasks like rebalancing. On the other hand, sector equity funds had the widest gap with at least some of that gap owing to the funds' higher volatility.

Bar graph comparing investor return gaps by US category group (10-year returns) including allocation, alternative, international equity, and more.

We found shortfalls between the average dollar's return and the average buy- and-hold return in all 10 of the calendar years that comprised the 10-year study period.

Automated Versus Ad-Hoc Investing

Context can also be helpful—it mechanizes investing, avoiding the potentially large timing costs investors can incur when making ad hoc transactions. Its importance is also apparent in the larger gaps common to narrower funds, like sector equity strategies, which aren't typically offered in such contexts and thus see more irregular purchases and sales that can weigh on dollar-weighted returns. 

By Fund Fees and Volatility

Our findings suggest a link between higher volatility and wider investor return gaps. More volatile strategies can push investors button, inducing them to buy or sell at inopportune ties. Emotions aside, these strategies are usually higher-maintenance, as their wide performance swings will warrant more frequent rebalances, forcing investors to transact at what can be fraught times.

Deliver Valuable Advice to Clients

Capturing returns is one of the many ways that advisors support clients. By guiding investors to make more informed decisions, you can meet client expectations and help close the return gap.

Show the impact of your recommendations with Morningstar Advisor Workstation. The platform gives you the tools and analytics to compare portfolios across risk, performance, and exposure dimensions.

Request a demo today.

Download the Full Report

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