The Investor Return Gap: What Advisors Can Learn

• Investors gave up 1.2 percentage points a year to poor timing. That gap added up to nearly $3.8 trillion in foregone wealth across the study’s $13.6 trillion asset base.
• Volatility had a much larger behavioral impact than fees. The gap between investor and fund returns was -0.4% for the least-volatile funds, compared with -2.1% for the most volatile funds.
• ETF flexibility can come with a behavioral cost. Spot bitcoin ETFs showed a gap of roughly 14 percentage points annually, with investors earning about -5.8% compared with an 8.5% fund return through June 2026.

Some of the strongest investor outcomes came from strategies that don’t require clients to make frequent decisions.

US stock fund investors, for example, captured virtually all of the returns generated by the funds they owned: 12.8% annually for investors versus 13.3% for the funds over the 10-year period. Morningstar also continued to find that allocation-oriented strategies tend to produce relatively narrow gaps because they can reduce the need for investors to make individual buy and sell decisions.

That matters because clients don’t have to make a bad decision very often for behavior to become expensive. Buying after a strong run, selling after a sharp decline, or constantly adjusting a portfolio in response to headlines can leave investors with a very different outcome from the one shown on the fund’s fact sheet.

Whenever possible, build discipline into the portfolio rather than relying on clients to exercise it.

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The investment industry has spent years emphasizing the importance of fees. However, the Morningstar report suggested that advisors should also pay close attention to volatility.

Morningstar’s research also revealed that investors have more difficulty capturing the returns of highly volatile funds. Large price swings give investors more opportunities to second-guess themselves and act at the wrong time.

The least-volatile funds had an investor return gap of just -0.4%, compared with -2.1% for the most volatile funds. Fees, by comparison, showed a much smaller difference. The cheapest fund quintile had a -1.0% gap, versus -1.2% for the most expensive quintile.

That doesn’t mean advisors should simply choose the least-volatile or cheapest fund available. Instead, the more useful question is whether a client can realistically stay invested through a strategy’s drawdowns.

A lower-cost investment won’t necessarily produce a better client outcome if its volatility causes the investor to sell at the wrong time.

For advisors, the takeaway is to evaluate cost and risk together. The best investment isn’t necessarily the one with the lowest expense ratio. It may be the one that a client can stick with when markets become uncomfortable.

ETFs have made investing easier and more flexible. However, that convenience also makes it easier for investors to trade.

Morningstar found a wider investor return gap for ETFs than for traditional open-end funds overall. That reinforces an important behavioral lesson: The more opportunities that investors have to trade, the more important it becomes to have a clear plan for when they should and shouldn’t act.

The research on spot bitcoin ETFs makes the point particularly clearly.

From the launch of spot bitcoin ETFs in January 2024 through June 30, 2026, investors earned about -5.8% annually, while the funds returned 8.5%. That represents a gap of roughly 14 percentage points a year.

Morningstar attributed much of that difference to the timing of investor cash flows. Investors tended to put more money into the funds after bitcoin had already risen sharply, then pulled money out during subsequent declines.

The example illustrates the difference between having access to an investment and being able to use it successfully.

That doesn’t mean every ETF creates the same behavioral risk. Rather, it suggests that advisors should consider how clients are likely to use a product, especially when the investment is volatile or emotionally charged.

For advisors, trading flexibility should be treated as a behavioral consideration, not simply a product feature.

Advisors can use the research to ask three questions about client portfolios:

• Where can we automate good behavior? Can contributions, withdrawals and rebalancing happen systematically rather than requiring the client to make repeated decisions?
• Where might volatility test the client’s discipline? Would the client realistically remain invested through the strategy’s worst periods? Or are we asking the client to tolerate more risk than they can handle?
• Where has technology made trading too easy? Are there holdings that invite clients to react to headlines, recent performance or market excitement rather than follow the long-term plan?

The challenge isn’t simply choosing the right investments. It is helping clients stay invested long enough to capture the returns those investments generate.

Advisors can’t control markets or predict exactly when clients will feel nervous. They can, however, design portfolios and processes that make good behavior easier.

That means automating where possible. It means understanding how much volatility a client can actually tolerate. And it means being especially thoughtful about investments that make frequent trading tempting. Ultimately, the advisor’s value isn’t just in finding the next winning investment.

It can be in helping a client stay invested in the one they already own.

Originally published on Advisor Perspectives.

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