Robo firms use data, analytics, and behavioural science to nudge users toward better choices
In times of crisis and financial trouble, people tend to respond irrationally based on fight-or-flight urges rather than rational thought and analysis. Investors working with financial advisors benefit from an experienced voice that can talk them back from the edge; those using robo-advisors may get less hand-holding, but they do get some forms of assistance.
As reported by Wall Street Journal contributor Simon Constable, some financial technology firms are using behavioural prompts to help push individual investors toward better making better financial decisions.
One major mistake they help users avoid is to buy high and sell low. In times of political turmoil, economic distress, or market turbulence, individuals tend to dump their stocks in a panic, only to buy them at higher prices later on. To curb this behaviour, Betterment sends messages to users that attempt to take action during times of market stress.
“We don’t proactively reach out to clients, only those logging in,” Dan Egan, Betterment’s director of behavioural finance and investing, told the Journal. Investors who wish to sell or reallocate holdings are informed of costs such as potential tax liability, as well as potential losses in future retirement income.
He explained that sending messages to every client with an investment account might be counterproductive, causing anxiety rather than keeping it in check. The prompts appear to be working, as Betterment has reported that investors who are told that they could incur a tax cost of at least US$5 are 62% less likely to push through with their decision.
Another firm that uses a similar approach is Personal Capital, a financial advisor and wealth management firm. A key pillar of their approach is to break down people’s financial plans into easily digestible parts, informed by data on customers’ spending patterns as well as how their savings and investments are allocated.
“Most people won’t carry through with a yearlong plan,” said David Eckerly, senior director of product marketing at Personal Capital, told the Journal. “This is all data-driven and specific to the people based specifically on their situation.”
Aside from directing individuals to mutual funds and ETFs with lower costs, it sends messages to individuals who have extra cash in a low-yield account, encouraging them to invest in ways that will earn more. The company has reportedly found that low-yield deposit accounts were translating into US$500 million in lost interest income per year.
