Advisers must embrace the possibilities of behavioural economics or they will see their customer base eroded by direct-to-consumer services that are already employing these tactics, experts have warned.
Speaking at a recent Money Marketing roundtable debate on behavioural finance, Finance & Technology Research Centre director Ian McKenna had a clear message for advisers reluctant to get to grips with the concepts of behavioural economics and nudge theory. He said: “There are going to be people nudging your clients, particularly next year with the emergence of chatbots from all sorts of organisations. Eighty per cent of UK consumers now have a smartphone, not just a mobile phone. These are the devices through which the vast majority of chatbot services and questionnaires will be delivered and if you are not the person bringing those insights to your customers other people will be.”
While many advisers may tend to see their main competition as D2C providers, Cicero Group executive director John Rowland warned advisers face another major threat to their mission to get people to save and invest for their future. He said: “The market is moving to mobile and the amount of money that is being invested by the brightest and best companies is gigantic. What they are investing in is how to sell stuff to people online. That is the force advisers are fighting against. The real innovation in the online world at the moment is from people who want to sell consumers stuff and get them credit which will allow you to buy things. It is a gigantic social force and while nudging is going to help the economic weight on one side of this is so much bigger than it is on the other.” Rowland pointed to Facebook’s strategy to optimise mobile advertising as one example.
Sesame Bankhall Group executive chairman John Cowan pointed out one area in which advisers could benefit from a better understanding of behavioural economics to help clients manage huge risks that are all-too-often ignored. “The glaring thing for me is before people can invest money they have to understand volatility and capacity for loss. The FCA is crawling all over that in the adviser community. But in the mortgage world you can get £200,000-worth of debt and be totally unaware of protecting your family, income protection and so on. Quite a large number of advisers say ‘It’s not my job’. I wonder if we should be asking, ‘How can we use some of the science of behavioural economics to communicate to the public about the risks they are running and what they ought to do about it?’” he said. “Half of the people born beyond 1960 will get cancer so rationally they ought to do something about that.”
Other panellists agreed this presented a significant challenge to advisers. “Research has shown that people value money today over money tomorrow,” said eValue strategy director Bruce Moss. “Whenever you are asking somebody to defer the instant gratification for something which is imponderable, they have no idea what they going to get back from a long-term investment product because they don’t know what the performance is going to be. If you are talking about life insurance or critical illness these events are the negative things you don’t want to think about, so you have a huge impediment. You have to make the future a little more concrete. Some of the technology available is quite funny, for example, it can show you what you might look like in 30 years time with wrinkles as a way to help people visualise their future. A whole area of research which is very interesting is creating conviction narratives – melding people’s emotional reactions with fundamental logic.”
McKenna highlighted several mobile apps that are successfully deploying “nudge” theory to encourage people to save more. “The Moneybox app takes every transaction that you make and delivers you a summary so that you can then swipe left or swipe right to decide whether or not to round up each transaction to a full pound. At the end of the month it will transfer that to your savings for you. So it encourages you to some small level of saving and you can control how you feel about it,” he explained. “As another example, Cleo is a text-based service that allows you to ask how much have I spent on X or Y this month? It might be how much you spent on eating out at restaurants or on lunches at the local deli. It’s these micro fragments of information which can drive people towards better behaviour and can facilitate saving.”
He added: “Unless we can help people to take better control of their day-to-day finances they haven’t got the ability to save long-term.” Nudge theory is often associated with herd mentality as it seeks to predict how most people would react when confronted with a given set of circumstances. This is crucial when it comes to understanding the investment markets, explained JP Morgan UK Dynamic fund manager John Baker. “When we are managing money on behalf of our clients we think behavioural finance is a very powerful tool. It actually underpins all of the individual investment decisions about stocks that we make. Markets are driven by people, people are driven by emotions and emotions mean people make predictable mistakes which lead to pricing anomalies for individual stocks in the market. It is that we seek to exploit.”
One clear example of this is spotting when the market gets “over-exuberant” about a particular theme, Baker explained. “From the 17th century tulip bubble to the dotcom boom and bust, investors have shown the capacity to overhype themes for hundreds of years. A third element of behaviour that we seek to exploit is the tendency of people to anchor on a particular number. A real world example of this moving outside finance is to consider how you are manipulated by retailers. For instance, if you are going to the supermarket to buy some yoghurt and you’re concerned about your lifestyle and your health you will go straight for something that is it declaring itself to be 95 per cent fat free because that must be good. But it is not because 5 per cent is actually quite high fat. People are just being influenced or manipulated by figures because of a tendency to anchor on a particular number even though that number lacks true informational value. So behavioural finance can also be important if you are looking to get a better outcome for your particular clients than that of the market as a whole.”
Retailers are already highly skilled in the art of nudge and it is not always a good thing for consumer finances, Rowland argued. He cited the example of hotel listings on travel aggregators. “They will tell you all of the people looking at this hotel, that there are only two rooms left on this day or that there is a 47 per cent discount. They also know that you’re only going to look at the first four or five results because nobody looks over the fold, so nudge can be used for good and for bad,” he said.
In terms of financial services, Rowland predicts the online channel targeting the mass market is going to be where most of the innovation happens. But canny advisers can piggyback on some of the research and insights made by others to improve their own communications with clients, he suggested.
“Advisers need to keep a really close eye on what’s going on because these guys are doing the research and development. Possibly it is a challenge, possibly it’s an opportunity. They might start taking adviser’s clients away because they have a better proposition, but also it is an opportunity if more people become engaged in the financial sector and then decide they need some proper personalised advice.”
While competition from all sides and the growth in technology may seem daunting, there are plenty of reasons to be optimistic, according to EA Financial Solutions director Minesh Patel. “What is fantastic about the point we have reached is the amount of tools and technology to make our process of planning and advising and building trust with clients easier. It is a phenomenal time for us to work in terms of the tools that are available,” he said.
McKenna said one opportunity for advisers is in the area of information sharing, thanks to new payment legislation. He said: “The payment services directive, which is going to come in before we leave the EU, is driving a huge opening up of banking information and will make it possible for advisers to get a whole load more information to better understand their consumers. Advisers should keep an eye on that. Because it’s called ‘payment services’ there is a huge temptation to think ‘oh that’s nothing to do with me,’ but actually it’s an enormous enabler for advice firms. ”