Behvioural Economics Unwrapped brochure by Chris Davies

BEHAVIOURAL ECONOMICS UNWRAPPED: STRATEGIES THAT WIN CUSTOMER CONFIDENCE AND TRUST Improving financial capabilities. © Engage Insight Ltd

CONTENTS

OVERVIEW

THE THEORY

THE FACTS

HOW BEHAVIOUR PLAYS OUT: MEET BARNEY BEHAVIOUR

STRATEGIES: INFLUENCE NORMS, IMPLEMENTING INFORMED CONSENT AND TREATING CUSTOMERS FAIRLY (TCF)

BE AND RISK MANAGEMENT

ENGAGING THE MARKET

SO WHAT DO WE NEED TO KNOW AND DO TO ENCOURAGE CONFIDENCE AND TRUST IN CONSUMER FINANCIAL CAPABILITIES?

CLIENT TYPES

HOW CAN THE INDUSTRY RESPOND? BY CREATING A ‘CO-BUILD’ PRODUCT AND SERVICE STRATEGY

FINANCIAL PLANNING AND THE ENDOWMENT EFFECT

FINAL THOUGHTS

BEHAVIOURAL ECONOMICS UNWRAPPED: STRATEGIES THAT WIN CUSTOMER CONFIDENCE AND TRUST

OVERVIEW “Imperfection is not our personal problem, it is a natural part of existing.” Tara Brach

What is Behavioural Economics?

Why is Behavioural Economics (BE) relevant?

The way we react to events in life defines us. We all have choices, yet dependent on a number of personal variables, businesses and people are difficult to predict. You can give the same resources to an individual or business yet over time you can bet what they do with them will lead to very different outcomes.

The global recession, credit crunch, financial crises, Euro debt crises, UK pension deficit, Banking payment protection insurance (PPI) & Long term care (LTC) missselling, LIBOR rate manipulation, MP expenses scandals and extortionate utility and petrol prices has made the public more discerning than ever.

Emotion is a major protagonist when it comes to either business or investment decisions. Whilst we may rationalise our decisions after the event, emotions are at the heart of our actions or failure to act. Human beings have a natural tendency for optimism; they use rules of thumb in decision-making and try at all costs to avoid loss or negative outcomes. In other words cognitive biases play a large hand in crucial decisions that affect us individually and as a society.

With the advent of the Retail Distribution Review (RDR) and other key UK and International regulatory impositions private and public sectors alike need to ensure the consumer is on their side to provide suitable conditions for sustainable growth and profitability so the economy and society as a whole can recover and prosper again.

This paper aims to understand and explore the principal elements of behavioural economics within the financial services industry and to apply key learning’s to ensure practical solutions. Psychology adds an evidence-based practice to ensure realistic and workable strategies for the boardroom and personal investing.

Where investor financial capability is concerned, we have a need to better manage client expectations and actions to ensure an improved outcome. This is born by the fact that less than a 1/3rd of the population plan for retirement and highlighted by recent comments made by Martin Wheatley the Financial Conduct Authority (FCA) CEO in referring to managing the ‘irrational investors’ needs.

Greater awareness for behavioural economics and its cognitive biases can then help this industry manage risk, heal its ways and mend its broken relationship with its clients.

BEHAVIOURAL ECONOMICS UNWRAPPED: STRATEGIES THAT WIN CUSTOMER CONFIDENCE AND TRUST

THE THEORY The case for traditional economic theory – Economic man

Figure 1: Efficiency Frontier

‘Homo economicus’ (Econ for short) bases his choices on a consideration of his own personal “utility function”. This means he acts to achieve the highest possible well being for himself, given the available information about opportunities and constraints and based on his ability to achieve these goals. Rationality is seen as a pre-requisite for optimising perceived opportunities. That is, the individual seeks to attain specific, predetermined goals whilst striving for the least possible cost: risk is managed whilst attaining optimal objectives. With returns distributions calculated by social science statisticians, we can see how utility functions work in maximising returns with expected utility and mean variance optimisation. This means expected utility theory then gives us the trade-off between expected return and risk. This reflects the fact that Econ can thus make optimal investment decisions Indeed ‘the efficiency frontier’ 1 was built by Harry Markowitz to show-case modern portfolio theory and diversification to optimise investment portfolios.

Markowitz H, portfolio selection, Journal of finance 77-91, 1952

BEHAVIOURAL ECONOMICS UNWRAPPED: STRATEGIES THAT WIN CUSTOMER CONFIDENCE AND TRUST

The case for behavioural biases: A cognitive dichotomy? Thinking Fast and Slow In his book Daniel Kahnman explains human thinking is governed by two systems, system 1 and 2. System 1 is fast, intuitive, associative, automatic, impressionistic (and can’t be switched off). System 2 is slow, deliberate and effortful, yet slothful and suffers ego depletion (tires easily). Its operations require attention.

There is no doubt that some people can control their emotions far better than others. Training for surgeons, police, air traffic controllers and other essential ‘frontline’ professions ensure emotions are kept in check. Such training surely has a place with traders and investment banks3 and indeed is a benchmark for the need to understand, explore and apply behavioural economics for the financial services industry.

Where investing is concerned, we operate a faulty set of cognitive traffic lights: we invest when we should stop and stop when we should invest. We tend to value funds we hold, more than those we do not. We can continue to throw good money after bad and separate our wealth into different accounts, focusing on the gains and discounting losses. We can underestimate the risk attached with investing, operate a selective memory and tend to invest in the familiar or follow the crowd on an investment tip. When flagged, emotional drivers can actually provide a ‘roadmap’ as to when to stay in or out of our chosen markets or how to design investment products. As Warren Buffet once famously said “the best time to invest is when there’s blood on the streets”!

2 3

Kahnman D Thinking fast and slow, Allen Lane 2011. Emotional regulation and trader performance, Fenton-O’Creevy et al, May 2011.

BEHAVIOURAL ECONOMICS UNWRAPPED: STRATEGIES THAT WIN CUSTOMER CONFIDENCE AND TRUST

THE FACTS •

Growing body of evidence that the standard model of the rational self-interested economic agent does not describe human decision-making; Customer’s reliance on advice – prone to trust and persuasion issues.

•

Advice is ubiquitous – 58% of investments influenced by advice, but advice by and large fails to de-bias clients and if anything may exaggerate existing biases or, in some cases even makes clients worse off.

•

Trust in advisers is high – conflicts of interest perceived a regulatory problem.

•

In a given experiment only 1.4% managed to make 5 investment choices optimally.

•

Narrow framers 20 – 30% disproportionately adverse to upfront fees.

•

Investments triggered by a change on life circumstances – 33% consider products from more than one provider.4

•

Dispositional biases are genetic and the retail investment market is prone to biases and errors.

•

Warning of provider and advice biases that may influence consumers' decisions.5

•

Consumers confused about the true nature of their investments.6

•

Cabot Research, Boston, polled investment managers on their selling procedures:7 - 81% relied mainly on judgment - Only 29% claimed to be ‘highly disciplined’ - Only 16% tried to assess if they had sold at the right time - Behavioural finance raises psychological issues - loss aversion makes it harder to accept even small losses; selling crystallises losses

•

4 5 6 7 8

National Statistics on financial capability is information based only. Education in financial capability makes little difference8

EU Consumer decision making in retail investment services: A behavioural economics perspective November 2010 FSA Risk Outlook 2012. Which? Magazine: The Money Maze 2010. FT Weekend May 7th 2011. De Meza D et al, CR69: Financial capability, A behavioural economics perspective, July 2008

BEHAVIOURAL ECONOMICS UNWRAPPED: STRATEGIES THAT WIN CUSTOMER CONFIDENCE AND TRUST

HOW BEHAVIOUR PLAYS OUT: MEET BARNEY BEHAVIOUR Barney comes in many guises and provides clear guidance as to how irrationality materialises and its cause and effect. Behaviour by name behaviour by nature, Barney exhibits biases that sit deep in the human psyche and provide the link between actions and consequences in the finance world. Cognitive Bias

Application

Every day examples

Overconfidence/ Planning fallacy/hindsight

Underestimation of risk/size of task, over-optimism and ‘selective memory’, stereotypical banker or stock trader may fit. We all suffer from this with the human condition engineered to be overoptimistic, in control and know more than we actually do.

Ability to pay off loans, mistaking return luck for skill, overtrading, blinded by information. Lack of seeking counsel.

Inertia/ Procrastination

Instant gratification, pain avoidance, fear and distress, industry noise and time out of a market can lead to immobilisation.

Taking the path of least resistance. ‘Learned’ pessimism.

Status Quo

Change aversion and hyperbolic discounting where short termism is favoured discounting over long-term benefits.

Attracted by service or product inducements. Endowment effect, value goods more when owned than when not.

BEHAVIOURAL ECONOMICS UNWRAPPED: STRATEGIES THAT WIN CUSTOMER CONFIDENCE AND TRUST

Cognitive Bias

Application

Every day examples

Cognitive dissonance

Embarrassment and buyerâ&#x20AC;&#x2122;s remorse.

Taking on too much debt, buying on emotion only.

Loss aversion

Endowment and myopic affect.

Holding poor performing funds and selling winners.

Regret aversion

Once burnt twice shy. Fear of loss, lower appetite for risk.

Underinvested portfolio and choice overload.

Mental accounting

Hedonic editing, segmenting attractive funds from debt or loss.

Income favoured rather than wealth/net worth. Focus on asset gains discounting debts.

Shortcuts

Affect heuristics: Rules of thumb. Experiential memory projection.

Ignoring risk-return profiling and take simplistic approach by investing in the familiar.

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BEHAVIOURAL ECONOMICS UNWRAPPED: STRATEGIES THAT WIN CUSTOMER CONFIDENCE AND TRUST

Cognitive Bias

Application

Every day examples

Information misuse

Anchoring effect: Prices and costs are set in context and superficial decision-making: Stereotyping, emotional contagion.

Past performance indicated future gains. Irrational fear on market pricing, follow the herd mentality.

Herding

Copying others behaviour, going with the crowd.

Investing on tips of friends or following fashionable strategy. Selling on blind panic.

Narrow Framing

Investing without considering all the implications.

Trading on market sentiment.

Escalation, sunk cost

Throwing good money after bad.

Continued investing into a losing investment despite size of loss.

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BEHAVIOURAL ECONOMICS UNWRAPPED: STRATEGIES THAT WIN CUSTOMER CONFIDENCE AND TRUST

STRATEGIES: INFLUENCE NORMS, IMPLEMENTING INFORMED CONSENT AND TREATING CUSTOMERS FAIRLY (TCF). There is a clear problem when it comes to consumer financial capabilities and managing their own affairs and that is accountability for their actions. All market participants have a role in improving capabilities including the regulators, product providers and retail investment advisers. If accountability is acknowledged and actioned, we can then design strategies to improve accountability for all. The end result will be improved financial capability and sustainable client trust and confidence.

Strategy Type

Financial Strategy description

Bias management

Positive TCF

Negative TCF

Limited options

Purchasing illiquid investments to avoid the urge to sell when the market falls.

Overconfidence, Planning fallacy. Purposefully streamlining options.

Encourage investment discipline

Herd clients' decisions without due care

Deadlines

Setting objectives such as an amount to save by a certain timeframe.

Overcoming inertia/ procrastination Status Quo.

Clear & agreed objectives

Placing pressure to close business

Counter-intuitive

Sleeping on investment decisions for a couple of nights before acting.

Cognitive dissonance. Using cooling-off periods.

Clients take time before investing

Decisions made without consultation

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BEHAVIOURAL ECONOMICS UNWRAPPED: STRATEGIES THAT WIN CUSTOMER CONFIDENCE AND TRUST

Strategy Type

Financial Strategy description

Bias management

Positive TCF

Negative TCF

Group decisions

Seek others' council such as financial advisers.

Regret/loss aversion. Use industry professionals.

Give relevant information & encourage feedback

Gathering insufficient information with no feedback

Discipline

Use of discipline to aid better financial decisions. (e.g. spend out of income not savings)

Aid better mental accounting. Use of ‘nudge’ rules.

Agree & risk grade individual saving pots

Poor fact finding does not ID preference for discounting debt

Delegation/ Co-Building plans/ products

Using the skills of experts in their field to invest. (e.g. Stockbrokers, DFMs). Involving investors and market participants in financial plan or product structures.

Shortcuts/Heuristics. Delegate decisions to others (e.g. spouse or a professional).

Use relevant skills, expertise & recommend expert guidance if outside remits

Favour shareholder & vested interests over clients.

Avoidance

Avoid market information (noise) on portfolio performance to stick with long-term strategy

Information misuse. Avoid people, news, situations that tempt you to action that you may regret.

Understanding clients' perception of industry

Allowing fashionable data to cloud judgement

Make it Personal

Consider the effect of the decisions on your personal investments and net worth.

Herding. Ensure your investment objectives are always at front of mind and avoiding a ‘group think’ mentality

Encouraging tailored thinking & bespoke solutions

Ignoring influential data that can be detrimental to client judgement

BEHAVIOURAL ECONOMICS UNWRAPPED: STRATEGIES THAT WIN CUSTOMER CONFIDENCE AND TRUST

Strategy Type

Financial Strategy description

Bias management

Positive TCF

Negative TCF

Diversification & Broad framing

Ensuring a spread of asset classes are used within a portfolio.

Narrow Framing. Keeping an open mind and using independent advice.

Diversify recommendations & solutions

Assume the client has understood the full facts and advice implications

Accountability

Ensure all parties are ‘on the same page’ and communicate clearly e.g. adviser, client and family members. Professional training in cost-benefit reasoning.

Escalation, sunk cost. Prevent throwing good money after bad by close attention to budget and others' influence.

Recognise and execute suitability and risk management by gaining client informed consent

Poor & incomplete records about past/present client investment decisions

BEHAVIOURAL ECONOMICS UNWRAPPED: STRATEGIES THAT WIN CUSTOMER CONFIDENCE AND TRUST

BE AND RISK MANAGEMENT The FSA Papers on risk; Retail conduct risk outlook 2011, Assessing suitability (Jan & March 2011)9 make it clear that a pre-requisite for advisories post RDR is to understand and manage the risk appetite of their clients. This builds on the behavioural economic work that discusses consumers’ tolerance and appetite for risk and associated capacity for potential loss. FSA Assessing suitability: ‘most advisers and investment managers consider a customer’s attitude to risk when assessing suitability, many fail to take appropriate account of their capacity for loss.’

The Code of Business Sourcebook (COBS) stipulates that the firm must manage risk. For example COBS 9.2.1R requires a firm to take ‘reasonable’ steps to ensure recommendations, or a trade is suitable for its customer. 9.2.2R asks to reference customer preferences regarding risk taking and their risk profile, and ensure they can cope financially with any relevant investment risks consistent with their investment objectives. All this amounts to assessing the risk the customer is both willing and able to take, as per 9.2.2R. This means we have emphasis, not only on risk profiling, but also on the customer’s appetite for risk and capacity for loss. Behavioural economics then can help guide10 the industry to not only understand customers’ relationships with risk but also its own. Thus a dynamic psychological contract11 is formed to assist understanding how people relate to their money, how the industry relates to its clients and their money and how clients react to the industry.

A clear understanding of systematic behavioural biases can facilitate a fully functional relationship between clients and money management and risk. For example, maintaining current choices even when they are not beneficial (status quo), putting off difficult decisions (procrastination), favouring short term gain over long term benefit (hyperbolic discounting), and placing emphasis on loss rather than on potential gains (loss aversion) can be recognised and managed accordingly to not only gain the right strategy but also the trust of the customer. This goes both ways. If such principles are understood by market participants, then organisations will become less dysfunctional and bureaucratic, information asymmetries are broken and a potential increase in consumer financial capabilities through functional engagement and transparent service and products.

FSA Capacity for loss: 'the customer's ability to absorb falls in value of their investment. If any loss of capital would have a materially detrimental effect on their standard of living, this should be taken into account in assessing the risk that they are able to take.

Retail conduct risk outlook 2011, Assessing suitability: Establishing the risk a customer is willing and able to take and making a suitable investment selection. Jan/March 2011.

De meza David et al, Financial capability, A Behavioural Economics Perspective. Consumer Research paper 69. 2008.

Rousseau Denise, Psychological contracts in organisations, understanding written and unwritten agreements. Newbury park, CA Sage 1996.

BEHAVIOURAL ECONOMICS UNWRAPPED: STRATEGIES THAT WIN CUSTOMER CONFIDENCE AND TRUST

Risk management solutions: 1. Trend following: The idea is to use simple mechanical rules to identify positive trends in the market: - When the signals identify the positive trend, invest fully in the market - When the trend is identified as being negative, invest fully in a “risk free” asset class - So the investment decision is bimodal - This can be applied to a single asset or asset class, or independently to wide range of assets or asset classes on an individual basis - So a strong self discipline built in to the process - And process takes advantage of positive market trends 2. Risk personality assessment: Behavioural finance suggests investors are slow to adjust to market movements due to; time in anchoring their views to new price data, they sell winners early and run with the losers (disposition effect) and herd into the market as prices rise and are comforted as others invest. Knowing which biases they are prone to can help facilitate the management of risk. 3. Adviser intervention: By following regular portfolio reviews with a qualified professional adviser the emotional response to market movement can be managed along with ensuring portfolio strategies are consistently aligned to the end objectives.

BEHAVIOURAL ECONOMICS UNWRAPPED: STRATEGIES THAT WIN CUSTOMER CONFIDENCE AND TRUST

ENGAGING THE MARKET: It's not a pretty picture: •

The majority of the UK’s wealth is based around London and the South East: in 2010 this region accounted for 46 per cent of the UK’s millionaire population12

•

Between 6% and 9% of adults have no bank or building society account of any kind (Kempson and Whyley, 1998);

•

Between 15% and 23% of adults lack a current account (Kempson and Whyley, 1998);

•

31–37% of households have no savings or investment products (Kempson, 1998; Office of Fair Trading, 1999c; Rowlingson et al., 1999);

•

27% of employees have no occupational or private pension (Budd and Campbell, 1998);

•

20–26% of households have no home contents insurance (Whyley et al., 1998; HM Treasury, 1999a; Office of Fair Trading, 1999c );

•

45% of households have no life insurance cover (Office of Fair Trading, 1999c);

•

29% have no access to credit from a mainstream provider (Office of Fair Trading, 1999c).

Barclays-Ledbury Research 2011 UK wealth map

BEHAVIOURAL ECONOMICS UNWRAPPED: STRATEGIES THAT WIN CUSTOMER CONFIDENCE AND TRUST

SO WHAT DO WE NEED TO KNOW AND DO TO ENCOURAGE CONFIDENCE AND TRUST IN CONSUMER FINANCIAL CAPABILITIES? Baby Boomers: 1946-1964 approximately 5m

Generation X: 1965-1980 approximately 12m

Characteristics

Common biases and issues

Potential consequences

Propositions for solutions

Silver surfers, 50+ women in wealth, enjoy F2F meetings.

Information misuse, Stereotyping, Optimism, Loss aversion

Inadequate planning, missed opportunities, overconfidence

Employ a financial coach, counter-intuitive emotional impulses with technology use and safety check via informed consent for risk & appetite for loss.

Characteristics

Common biases and issues

Potential consequences

Propositions for solutions

Peak earning yrs, Inheritance, Pension savers, Wealth building, Dependent children.

Herding, rule of thumb (heuristics), Regret aversion.

Lack of due diligence, oversold to, panic buying, trend & returns chasing.

Increase investment discipline & avoid market ‘noise’ & consider personal consequences of any actions. Frame and prime risk management by clear communication on the patterns of investment experience. Fully diversify portfolios.

BEHAVIOURAL ECONOMICS UNWRAPPED: STRATEGIES THAT WIN CUSTOMER CONFIDENCE AND TRUST

Generation Y: 1981-1995 approximately 13m

Mass Affluent: Majority = baby boomers

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Characteristics

Common biases and issues

Potential consequences

Propositions for solutions

Instant answers, Discerning, demanding, deal hunters, Boundary-less career

Optimism, Herding, Stereotyping.

Overconfidence in own ability, DIY miss selling scandals (school of hard nocks) cognitive dissonance.

Treat and respect as a virtual client, intelligent and bespoke use of social media, customfit & design IT around their needs & focus on long term and instil confidence through active involvement advice and education on emotional intelligence.

Characteristics

Common biases and issues

Potential consequences

Propositions for solutions

Savvy, well read, Manageable debt, Regular savers.

Endowment effect, Stereotyping, Optimism.

Disillusionment with industry, DIY investing.

Healthy engagement e.g. Co-build product & service strategies with this consumer, a focus on lifestyle/inflation plus strategies. Bespoke & transparent services.

BEHAVIOURAL ECONOMICS UNWRAPPED: STRATEGIES THAT WIN CUSTOMER CONFIDENCE AND TRUST

Mass Market: 1.5m=No financial products/5m=No pensions

Retired 12m

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Characteristics

Common biases and issues

Potential consequences

Propositions for solutions

Financially innate, focus on dayto-day, Debt ridden, Dis enfranchised.

Inertia, Status Quo, Cognitive dissonance, Sunk cost.

High APR on debt, poor long term planning and understanding.

Nudge style auto investing & switching strategies e.g. NEST, Limited investment options potentially avoids inertia. Build in accountability sessions to show & tell negatives and positives & gain commitment to financial planning.

Characteristics

Common biases and issues

Potential consequences

Propositions for solutions

De-accumulation, Wealth Stewardship.

Loss aversion, Mental shortcuts (Heuristics), Mental accounting.

Missed tax planning opportunities, Sunk cost.

Broad frame advice solutions to cover all potential goals. Adviser intervention for volatility, risk managed pension pots, attaching individually tailored goals and risk/loss appetites to each.

BEHAVIOURAL ECONOMICS UNWRAPPED: STRATEGIES THAT WIN CUSTOMER CONFIDENCE AND TRUST

Entrepreneurs: 3.4% of adult working population

And finally the industryâ&#x20AC;Ś 350,000 of the working population

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Characteristics

Common biases and issues

Potential consequences

Propositions for solutions

Focused risk takers, control freaks, single minded. Time poor

Narrow framing, Mental accounting, Optimism.

Missed growth opportunities, Overtrading, Overconfidence.

Delegate to professional adviser, for asset allocation. Use of a trading account to allow tactical response to market movements and input from this consumer. Focus on qualitative analysis.

Characteristics

Common biases and issues

Potential consequences

Propositions for solutions

Competitive, insular, diverse, conservative, homogenous,

Narrow framing, Loss averse, Optimism, planning fallacy, Heuristics.

Self interested, self-serving, opaque, uncompetitive, misunderstood, over-optimistic, poor emotional intelligence, ignorant of mistakes and consequences.

Transparency, fair fees, diversity of services and simple products. Technology designed around client needs. Products and advisers fee services to de-bias consumer cognitive biases. Advisers to manage their own biases in interaction with clients e.g. lean against instincts that can cause conflict of interests.

BEHAVIOURAL ECONOMICS UNWRAPPED: STRATEGIES THAT WIN CUSTOMER CONFIDENCE AND TRUST

CLIENT TYPES:

IDENTIFYING BEHAVIOURAL BIASES CAN FACILITATE BETTER CLIENT RELATIONSHIPS THROUGH SEGMENTATION BY RELATIONSHIP TYPE AND USING INFLUENCE NORMS TO CREATE HIGH ENGAGEMENT

Type

Style

Biases

Influence norms

Authoritarian

Decisive, compelling long term vision, dominates

Disposition, hindsight (selective memory)

Slow, clear and respectful fact finding.

Networker

Communicator, open to new ideas, expressive, uneducated bets

Herding, status quo

Research topic at hand. Full due diligence, show-tell facts.

Pragmatist

Logical, system driven, rational decision maker, impatient, sell quickly

Narrow framing, Mental accounting

Diversification, regular reviews.

Perceptive

Instinctive & intuitive, confidence on gut feel, flexible

Overconfidence & Cognitive dissonance

Objective analysis, solid research, structured approach.

Investigator

Strong doubter & wary. Difficult to delegate & questions.

Narrow frame, loss/regret aversion, inertia, sunk cost.

Logical explanations, sounding board & patience.

Adventurer

Entrepreneurial, ambitious, success/ progress driven. Self-Sacrifice.

Overconfidence, mental accounting

In depth fact-finding, firm action planning aligned to personal goals.

Enthusiast

Romantic visionary, high risk tolerance, opportunist. Self-aware & optimistic

Overconfidence

Communicate risk clarity, Present boundaries.

Traditionalist

Invests in familiar, Consistent, experienced, strategy focused, left brained.

Anchoring, information misuse/heuristics. Consistency, transparency, promote selfawareness through targeted questioning

Consistency, transparency, promote selfawareness through targeted questioning.

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BEHAVIOURAL ECONOMICS UNWRAPPED: STRATEGIES THAT WIN CUSTOMER CONFIDENCE AND TRUST

HOW CAN THE INDUSTRY RESPOND? BY CREATING A ‘CO-BUILD’ PRODUCT AND SERVICE STRATEGY:

Baby Boomers

Generation X

Generation Y

Mass affluent

Mass market

D2C Platform

Self trade account

Supermarket

Pick ‘n Mix

Wrap

Advised asset mix

Retirement Investment strategies

Auto switch to risk averse funds

Phased investment

NEST auto enrolment

Phased investment

NEST auto enrolment

Asset allocation funds

Advised Discretionary managed

Light touch model for self direction

Advised Bespoke Portfolios

Light touch model for self direction

Limited choice portfolios

Focused regular savings

Model portfolios

Risk managed & targeted

Segmented investment solutions

Individually advised risk graded pots

Risk managed & targeted

Retired

Entrepreneurs

Advised Risk averse strategy

Tactically advised Bespoke portfolios

Simple product choice Risk managed & targeted

Risk managed & targeted Individually advised risk graded pots

Individually advised risk graded pots

BEHAVIOURAL ECONOMICS UNWRAPPED: STRATEGIES THAT WIN CUSTOMER CONFIDENCE AND TRUST

FINANCIAL PLANNING AND THE ENDOWMENT EFFECT:

USING THE ENDOWMENT EFFECT TO CO-BUILD FINANCIAL PLANS AND CREATE CLIENT BUY-IN, TRUST AND LOYALTY Encouraging client ownership for their financial planning strategies has shown an increase in financial capability and high engagement with their financial advisers. This is one way advisers can substantially enhance the client

Target Lifestyle Assessment fee disclosed

experience and offer high value in their service proposition. Using the Endowment Effect to co-build financial plans and create client buy-in, trust and loyalty

Prospect MEET 1 Positioning. Fee agreed, Strategic Lifetime Model (SLM) presented, Start building financial plan

Client

Follow up; ‘Homework’ Personal summary Assets & Liabilities Goals Cash flow Household budget

MEET 2 Advice. fee payment, SLM revisited and financial plan agreed

Follow up ‘Homework’ review comments and advice

MEET 3 Implement strategy: pay fee , finalise SLM and financial plan.

Follow up and delegation

Outcome: Complete in time for Prep, Fee disclosed

Outcome: Signed initial advice form, time frame. co-build plan, fee agreed.

Outcome: Engage & do their homework (commit).

Outcome: ID drivers/goals, Agree savings goals and strategies, % fee paid.

Outcome: Confirm strategies Confirm requirements for next meet.

Outcome: Signed financial plan, client agreement signed application, final % fee paid.

Outcome: Agree servicing arrangements.

How? Position in the positive

How? Impact = I’m impressed Connect = In common Understand = empathy Project = what if ? Commit = signed IA form

How? e mail Lifestyle Questionnaire 5 sections

How? Review homework Review Strategies

How? e mail 5 Financial Plan sections

How? Paperwork ready Req’d details from client

How? Clear instructions and diary management

BEHAVIOURAL ECONOMICS UNWRAPPED: STRATEGIES THAT WIN CUSTOMER CONFIDENCE AND TRUST

FINAL THOUGHTS Traditional economics and behavioural economics are not mutually exclusive. We believe that if both are explored, understood and applied to financial service organisations in a constructive manner, the industry can develop broad thinking strategies that will enable more suitable products to be built, customer ownership for their financial planning needs, better regulations in identifying root causes and trusted client relationships in high engagement by the use of technology, face to face services and bespoke distribution strategies. With the FCA already nailing their colours to the mast, behavioural economics is now central to their regulatory strategy. This means that if market practitioners can gain an understanding for behavioural biases and incorporate influence norms into their services, products and distribution strategies, then not only is there a better chance of customer accord, but also compliance with the FCAâ&#x20AC;&#x2122;s new directives.

© Engage Insight Limited 175-185 Grays Inn Road London WC1X 8UE Tel: 020 3005 5305 email chris.davies@engageinsight.co.uk website www.engageinsight.co.uk BEHAVIOURAL ECONOMICS UNWRAPPED: STRATEGIES THAT WIN CUSTOMER CONFIDENCE AND TRUST 24