Behavioural research paper recommends ways for advisors to improve follow-through on financial plans
As the perceived importance of investment management continues to decline, advisors are under pressure to prove their value to clients. That means aside from creating financial plans for their clients, they also have to address behavioural problems in implementation — and a white paper from the University of Toronto’s Rotman School of Management offers some help on that front.
The paper, titled Why Do People Fail to Act on Financial Plans? A Behavioural Lens on Financial Planning, examines the drivers of discontinuity between people’s intentions and actions during the financial planning process. It identified two types of issues: intending but not getting a financial plan written, and getting a plan written but not executing on it.
With respect to the second gap, the authors from BEAR (Behavioural Economics in Action at Rotman) noted several possible root causes based on behavioural-science principles. These include:
- Licensing effect – people may take their past good deeds as a “license” to engage in problematic or immoral behaviours;
- Overchoice – when presented with too many choices, people tend to put off making decisions or taking action;
- Conflicting goals – being faced with conflicting objectives (e.g., planning for retirement vs. paying for child’s education) causes people to fall into a deliberative mindset, which blocks implementation of any one goal;
- Procrastination – people tend to delay or postpone preparing for the future in favour of enjoying themselves in the present;
- Lack of salience in benefits – clients may believe that the costs of using a financial planner outweigh the benefits, or think that advisors are not acting in their interests;
- Ambiguity – when clients don’t know what they can realistically expect in terms of the financial planning process and timeline, they’re less likely to stay committed; and
- Information complexity – people presented with large quantities of information or choice options tend to have a harder time making decisions
So how can financial planners improve their practice, specifically when it comes to helping clients implement financial plans? The BEAR paper offers two suggestions.
First, they can take a diagnostic approach. Financial planners can use behavioural-science tools to suss out the issues that their clients are facing. Once they’ve determined the root causes that get in the way of action, they can help clients change their behaviour using potential interventions provided through choice architecture.
Second, planners can take a design approach. Using behavioural insights, advisors can re-evaluate the products and processes they provide, and then redesign the practice to minimize the chances of behavioural problems arising in the first place.
The paper offered some points to consider in packaging a financial plan:
- Manner of presentation to the client: should the plan be written in concrete or abstract language?
- Design of the plan: should it be a consolidated detailed plan, or would a collection of short-term brief plans be better?
- Readability and medium of choice of the plan
