Analysing the investor life cycle in a South African universal bank
Abstract
Individual investment decision-making theory revolves around the logical choices an investor is expected to make in order to achieve the maximum return on investments. The investor life cycle theory is often used as a guideline to determine how investors will invest based on their predicted life cycle phase. There are limitations to implementing investment theory in real world scenarios and determining in which phase of the investor life cycle an investor falls is no easy feat. Another challenge stemming from the theory of behavioural finance is that investors do not always invest as would be expected due to a lack of knowledge, incorrect information or even fear. This makes it difficult to group investors into set life cycle phases. In order to make more accurate predictions on the life cycle phase an investor is in, large volumes of behavioural data are required. Banks have the means and ability to gain valuable insight from the vast amounts of data they have access to on their clients. Due to this, banks play an increasingly important role when it comes to the financial well-being of their clients. For banks to remain competitive against the wave of new competitors, diversified investment product ranges need to be provided to their clients. The main purpose of the study was to analyse how South African banking clients invest their disposable income versus what the theoretical patterns of the investor life cycle proposes. Due to investors having different needs, goals, and levels of investment knowledge, banks need to identify distinguishing demographic factors that can be used to determine the phase in the investor life cycle. The empirical research was conducted in order to add to the body of literature within the field of investment management. The study used a quantitative research approach with a positivist research paradigm. The target population included investors at a South African universal bank. The inclusion criteria required these investors to have a main transactional account at the
specific universal bank with at least one additional investment product held. A sample of 19 911 investors was obtained using a stratified sampling technique. The sample was also subdivided into low-, medium- and high income and wealthy investors as the focus was placed
on differing investment patterns based on individual income levels. The investment products that were selected for the study constituted products easily accessible to the average South African investor at a universal bank and excluded investments specifically targeted at saving towards retirement. The study highlighted the value of Big Data analysis for banks when it comes to promoting investments to existing clients. Investors in the lower income brackets do not necessarily have access or the financial means to obtain financial advice. Marketing campaigns educating investors about the different investment products available to them can have a profound impact on their saving and investment patterns. The study differs from previous studies, as it excluded investments structured towards retirement and investigated how investors invest their remaining funds. It also analysed investors at a single universal bank, where these investors have access to almost all their financial requirements at a single financial institution. The analysis found that the investment patterns of South African investors strongly contradict the foundational literature of the investor life cycle. South African investors are skewed more
towards low risk investment options like cash, across all age ranges, only investing in higher risk instruments much later than what the investor life cycle theory suggests. Female investors are especially risk averse, however, the effect becomes less prominent as income level rises. There are also still inequalities between the different racial groups, with African investors of all income levels investing less than the other groups with similar income levels. The findings tie back to the history of Apartheid in South Africa, with African investors investing less than the other race groups. African investors make up the biggest portion of investors in South Africa and banks have an opportunity to improve their investment habits. This will not only make these clients wealthier, but also more profitable for the bank and the South African economy. The risk averse investment style seen in the findings for all South African investors can be explained by the slow economic growth experienced in South Africa, with investors having less disposable income to invest. Banks can play a significant role in driving behavioural changes and promoting a culture of investing, rather than promoting more debt products, especially in a slow expanding economy like that of South Africa. Using these insights, banks can model investor behaviour and promote healthier investment habits, especially among young African investors. Banks can use the findings to construct new investment products that more closely meet the investment needs of their clients. By combining the theory of the investor life cycle, with the results found in this study, banks can also improve the expected returns for the clients as well as improve overall client retention due to a wider investment product range being offered.