Unsure what clients want? Science can help

This article is sponsored by Morningstar

It’s not easy being a financial advisor. After mastering increasingly complex investment strategies, an advisor then needs to be a master of human nature – somehow aligning the hard math of the markets with the hazily defined goals of their clients.

This is a delicate balance of very different skill sets. And the failure to get it just right is one of the biggest reasons a client will decide to go elsewhere for advice.

Fortunately, science is starting to help. Thanks to new progress in our knowledge of human behaviour, it’s becoming easier to filter out a client’s biases and create a clearer picture of what they really want.

Research scientist Ryan Murphy says one of the first things to understand about people is that they are sometimes strangers to themselves.

“The things people say off the top of their heads may not represent what they really believe,” Murphy explains. “Our research found that 75% of people will change at least one of their top three financial goals if we give them some more time and space to think about their motivations.

“People aren’t lying,” he says. “What are your overarching goals  is just one of those questions that's easy to get wrong because people don't typically think in 30-year timeframes about what they want to accomplish with their money.”

Currently the Global Head of Behavioral Insights at Morningstar, Murphy has spent years studying human behaviour as a research scientist at Columbia University’s Center for the Decision Sciences, and then as Chair of Decision Theory and Behavioral Game Theory at the Swiss Federal Institute of Technology.

Together with colleague Samantha Lamas, a Senior Behavioral Researcher at Morningstar, they recently sat down with Wealth Professional to discuss how clients think when investing.

Why clear goals are important

When an advisor asks a client why they want to save money, the most common response is retirement. But what does that mean exactly?

Some people may see retirement involving a lot of travel and a second home at the lake. For others, it may simply mean not becoming a burden to their children.

By having a deeper conversation with a client, an advisor can unlock more meaningful motivations for saving money. This helps the client form a stronger commitment to investing, while allowing the advisor to focus on a client’s true goals rather than a number of arbitrary benchmarks.

According to Morningstar research using a goals-based approach to financial planning helped increase client wealth by more than 15%.

The benefits extend beyond returns as well. By taking more time to learn about a client’s motivations, an advisor can develop a much closer relationship with their client.

Lamas says advisors have told her this journey of discovery is a great way to start a meaningful conversation with a client. “And as that journey continues,” she adds, “it can create trust that convinces the client to recommend the advisor to their friends and family.”

Short-term biases versus long-term goals

When a potential client walks into an advisor’s office, their minds are often filled with the noise of recent activities, conversations, and emotional ups and downs.

“They may be thinking ‘where's my cell phone, or what am I having for lunch?,’ Murphy says. “They may not be thinking about their projected earnings over the next 30 years.”

This noisy clutter of temporary biases can drown out a client’s more deeply held convictions. Lamas says one example is something called availability bias. This is our tendency to let information that comes most readily to mind influence our decisions.

“Let’s say a person meets an advisor the day after they went to a great party at someone’s house,” Lamas says. “Now there may be a greater chance they will mention buying a house as a financial goal, even though buying a house isn’t really what’s right for them.”

There’s another emotional bias that some advisors will recognise immediately. It’s called hyperbolic discounting, and describes our tendency to choose a smaller reward now over a larger reward in the future.

One of the obstacles that advisors face is that these short-term biases can feel very natural to us. People live in the moment and want to feel pleasure in the moment as well. A decision to delay this gratification, especially for time periods up to 30 years, is a very unnatural thing to do.

And if you take a step back and look at the big picture of human history, it’s no surprise why it feels unnatural. Up to the 1920s in North America, life expectancy was still only about 50 years. Today, it’s over 80.

So when you ask your client how they want to retire in 30 years, you’re pitting a few short decades of society adapting to the idea of retirement against millions of years of biological impulses.

Overcoming biases

Providing financial advice isn’t easy. However, new research about human behaviour can make it easier. Murphy and Lamas describe a process where an advisor can explore a client’s motivations in a way that crystallizes some goals while weeding out others.

“Sometimes investors don't know that they don't know,” Murphy explains. “We help them think about this in a more careful way, and then they start to self-discover what really motivates them and what they're trying to accomplish. And when you show they've overlooked their own thinking, you often see delight because they’ve discovered something new.”

Without getting too technical, Murphy and Lamas illustrate how this process of de-biasing, or guiding people around their biases, provides a useful framework for nudging people toward a clearer understanding and better decisions.

For example, if a client walked into the office and said they want to buy a house, an advisor could deploy several techniques to unpack the motivations for this new desire to buy a house.

Whether they are sifting through a checklist of priorities, assessing an architecture of choices, or using other tools emerging from the latest research in cognitive science, the advisor and client will find themselves in a process that is filtering out short-term biases while clarifying the longer-term goals.

“This scientific approach to understanding a client’s goals is a great differentiator for advisors,” Lamas says.

“In a financial industry filled with arbitrary benchmarks and generic online surveys, this is a way for an advisor and their client to learn, discover new goals and forge a trusted relationship.”

Suggested read: How to mine for goals? People can sometimes be strangers to themselves, and that can obscure financial planning. How can advisors help investors identify financial goals that are relevant not just today, but for the long term? Read this Morningstar whitepaper to learn more.