Are you confronting clients' biases?

Investment advisers are being told to pay more attention to the unconscious biases that may be driving their clients’ behaviour.

Friday, April 22nd 2016, 6:00AM

by Susan Edmunds

Paul Gregory

The Financial Markets Authority, in conjunction with the Ministry of Business, Innovation and Employment (MBIE), Treasury, the Inland Revenue Department and the Commission for Financial Capability (CFFC), has released a new white paper looking at behavioural economics.

It says there are three key barriers to good investment decisions: Preferences – clients’ emotions and psychological experiences, their beliefs, and their decision-making rules-of-thumb – the flawed short cuts investors use to assess information.

“We might assess financial advice as good on the basis of a few successful investments, even though those could reflect pure luck,” the paper says.

“We over extrapolate. We are much better at living in the present than thinking about the future. We naturally expect our current feelings, attitudes and preferences to be unchanged.”

The paper says financial service providers such as investment advisers can help by making the decisions easy for clients, making the prospect attractive, making it social by encouraging commitment to friends and family and making it timely by prompting decisions when people are most likely to be receptive.

The FMA said it was aware that financial service providers already used behavioural techniques to better understand their customers, but said this was primarily for commercial purposes.

“The Government agencies that partnered for the paper are encouraging financial service providers to also use the understanding that comes from this work, to help their customers make better financial decisions which are often complex and have long-term impacts."

Paul Gregory, the FMA’s director of investor capability, said advisers needed to understand what was happening for their clients, even if the client themselves was not fully aware of it.

“When you’re having a conversation both sides should be aware of the fact these things are operating and take that into account.”

He said he had heard advisers talking to the FMA about enjoying helping people plan their futures and working out what they wanted. “This is a way to make that a better quality discussion."

Report author Marcos Pelenur said a key message for financial service providers was that information needed to be made easy for clients to understand. “That’s the heart of it, how do you show the message?”

As well as writing a paper, the FMA, MBIE and CFFC have partnered with Kiwi Wealth on a behavioural insights trial to commence later this year. The trial will assess different approaches to encouraging default KiwiSaver members to make an active fund choice. Results will be shared with industry once the trial is complete.

Read the white paper here.

Tags: FMA investment