HOW THE EMOTION QUOTIENT
IMPACTS YOUR CUSTOMERS' RETIREMENT EQUATION
Bruce Ferris

Bruce Ferris is Vice Presidnet of Strategic Account Management, Prudential Annuities.
 
 
 

FIVE DOMINANT EMOTIONS can influence retirement investors to react to market uncertainty in ways that may not be in their best interest—and bank customers may be at an even greater risk. That's according to "Behavioral Risk and Bank Customers in The Retirement Red Zone®", a study by Prudential Annuities that explores the link between emotions and financial decision-making for bank customers, compared with general U.S. investors.

The study, which Prudential Annuities commissioned with the University of Connecticut (UConn) School of Business, looked at a total of 1,008 people who fell within the five-year range before or after retirement, the critical investment window that Prudential calls The Retirement Red Zone. Twelve percent of those surveyed were bank customers who make investment decisions with the assistance of bank professionals.

Through the research, experts at UConn created a survey to determine an individual's Retirement Emotion Quotient (EQ)®, which scores the potential emotional impact based on responses to survey questions. An investor's EQ score reflects the combined impact of emotions that can be identified and measured through the survey.

The study identified five dominant emotions that can influence investment decisions: fear, regret, inertia, aggressiveness, and susceptibility. Among these, fear and regret are the most prominent emotions, especially for bank customers—86% of whom indicated a high or moderate degree of fear and 84% indicating similar degrees of regret, compared with only 71% of the U.S. population who indicated fear in high or moderate degrees and 80% regret.

The study also found:

• Three of four investors (76%) are affected by their emotions to a moderate or high degree. And no single group is free from the influence of behavioral risk—the risk that emotionally driven behavior can have an adverse effect on investment decisions. Seventy-two percent of men and 80% of women have moderate or high EQ scores, yet only one-third of Retirement Red Zone investors surveyed actually believe that emotions impact their decisions.
• Behavioral risk can influence bank customers to react in ways that may not be in their best interest. For example, all investors influenced by fear are less likely to take managed risks or plan steps to secure their futures. Those experiencing regret are unlikely to take positive future steps toward a secure retirement, citing a concern about regretting their actions.
• When confronted with the possibility of significant losses within The Retirement Red Zone, bank customers question their confidence in retirement planning. Roughly 90% of pre-retiree bank customers said they wished they had incorporated some downside protection of their retirement assets, while three in four pre-retiree bank customers would be more likely to overreact by taking some or all of their money out of the stock market—a move that could potentially further limit their chances for financial recovery.
• Products that provide accumulation and income guarantees can help mitigate the effects of behavioral risk. However, many bank customers, like those in the U.S. population sample, are unaware that these products exist. In fact, 61% of bank customers were not aware of guarantees available to lock in market gains for income or accumulation, and 46% were unaware of guarantees to help protect against principal loss on investments used to generate lifetime income. Yet nearly 90% would consider such a product, and when you add the benefit of income or accumulation guarantees, 85% of bank customers would be likely to stay in the market and weather short-term losses.

The study set out to answer questions about the impact of behavioral risk on bank customers in The Retirement Red Zone. Research findings of the survey demonstrate that while bank customers are similar to investors who use financial professionals from other distribution channels, they tend to be more concerned about running out of money too quickly. They are more fearful of investment losses from investing too aggressively and prefer financial products that offer a measure of downside protection while still participating in market gains. They also exhibit a strong interest in financial products that provide guaranteed lifetime income.

Finally, the survey's findings confirm that as the retirement dialogue continues to shift toward a discussion focused on generating income in retirement, products with income guarantees will become an increasingly important element for Americans. By incorporating these kinds of products, bank customers in The Retirement Red Zone may be able to allay the potential negative effects of behavioral risk.

Guarantees, of course, are backed by the claims-paying ability of the issuing company. For more information on the "Behavioral Risk and Bank Customers in The Retirement Red Zone" study, including a copy of the report, visit www.retirementredzone.com.