Jason Andriessen is consulting partner at financial services research boutique MYMAVINS and chair and co-founder of Catalpa, a community of independent financial planners.
There is a need for planners to overcome human biases and entrenched behaviours to enable clients to unlock the benefits of advice.
Research shows that financial planners can transform the lives of their clients, but only if advice is accessed in the first place, and then only if the advice is implemented. Financial planners need to do more than just inspire their clients. They need to overcome human biases and entrenched behaviours before clients can unlock the benefits of advice.
We know that Australians worry about money more than anything else in life. According to the Australian Psychology Society, financial issues are the leading cause of stress amongst Australians; higher, even, than worries about health. Financial stress is bad for our families and it’s bad for our communities. Those who feel financially stressed drink more, sleep less, have worse mental and physical health, and have more conflict in their personal relationships.
But while many Australians worry about money and feel short-term financial stress, we know that advice can help.
In recent years, CoreData has undertaken research into the value of financial advice. We have found that consumers with an active relationship with a financial planner feel more organised, are more confident when making financial decisions, and they’re less likely to suffer from financial stress.
When a financial planner successfully reduces a client’s financial stress, they may also lessen the client’s tendency to turn to alcohol or drugs, help them sleep better, and improve the quality of their family relationships.
And that’s just the start. Consumers who have an active relationship with a financial planner are also demonstrably better off financially. They are able to spend more, do more, and they enjoy more wealth with less risk exposure along the way.
For instance, in research recently undertaken for Sunsuper, CoreData found the value of ongoing advice first accessed by a single 58-year-old female amounted to more than $200,000 over her lifetime.
But advice is only helpful if it’s accessed
There are lots of reasons people don’t access the services of a financial planner. Concerns about trust, particularly following the Royal Commission, have been well-documented. Trust in advice has dropped by almost half since the start of that inquiry.
There’s also a perception amongst Australians that their circumstances aren’t complex enough and they don’t have enough money to make seeking advice worthwhile. Sure, people are worried about the cost of advice as well, but what’s often overlooked is fear.
People are fearful of looking silly, being embarrassed about their past decisions, and generally being told bad news that it’s all too late for them. The technical term for this is cognitive dissonance – the discomfort someone feels when their behaviour is disconnected from their values system. It feels bad, so people put their heads in the sand and avoid action.
In the past, super funds have engaged their members poorly. Over several years they have written to their members advising them that in order to have a comfortable retirement, members will require more than $60,000 a year to live on. They would inform members that in order to fund that, they would require a balance of more than $1 million.
And what would happen? Precisely nothing. Members would suffer cognitive dissonance. Everyone wants a comfortable retirement, but not many people have any chance of achieving a super balance of $1 million. It all feels too hard, so they disengage.
But superannution funds are now awake to this and financial planners should be too.
People don’t make rational decisions, so we need to appeal to their emotions. This is commonly achieved through a process called ‘nudging’. It demands only small, non-threatening changes in people’s behaviour at any point in time. But the cumulative effect of repeated nudging produces a significant end result.
Talk is cheap
Most of us make financial planning more complex than it needs to be. Strip it back and it’s about gaining an understanding of the client’s current circumstances, what they want to achieve, sizing the gap, and setting a course for achieving the articulated goals.
It’s understandable that clients feel an instant sense of relief when they’re presented with their financial plan. They feel inspired, optimistic, and a sense of control. And these positive emotions feel great. But they don’t actually change anything.
In fact, neuroscience tells us that they may make things worse. That’s because the anticipation of the reward in itself triggers the dopamine pathways in the brain, so that we feel a sense of joy. That sense of joy satisfies us, so we don’t actually feel like we need to do the hard work.
We see the same phenomenon with our sporting heroes, where we can share some of the glory without sharing any of the pain.
Consider Eric Liddell, the extraordinary Scottish athlete who won the 400-metre race at the 1924 Paris Olympics. It’s a particularly inspiring story because the 400-metre race wasn’t even his event.
He was a natural sprinter but withdrew from his preferred 100-metre race because the trials were on a Sunday, the sabbath for Christians. That’s just the start. Eric Liddell died in 1945 in a Japanese civilian internment camp in China – five months before liberation.
It’s an uplifting and inspirational story. But inspiration alone simply doesn’t get us there. If it did, then everyone who watched the 1981 film Chariots of Fire and learned about Eric Liddell, would be hard at it in training for the Olympics.
Implementation is a grind
So, just telling people what they should do in a Statement of Advice isn’t particularly helpful. It’s not helpful because it doesn’t actually change anything.
In order to effect meaningful change and bring about new outcomes, we need to change our clients’ behaviour. According to Harvard positive psychology professor, Tal Ben-Shahar, the key to creating lasting change lies in three intentional behaviours: reminders, repetition and rituals.
This is a useful framework for a financial planner seeking to execute on advice and help the client actually achieve the goals in the plan.
Reminders are external cues that focus our attention on a particular commitment we made. The best reminders are simple, like a daily calendar note telling us to review our discretionary expenditure.
These regular reminders will pave the way to repetitive action, which is essential for lasting change. In time, a new ritual is formed. And that new ritual becomes a part of your daily life; a new way of operating. It becomes natural to you because, physiologically, a new neural pathway in your brain has been created, which leads you to act in a certain way, under certain conditions.
Unlocking the benefits of advice
Telling people they should eat less and exercise more is good advice. But it’s not really very helpful. In the same way a well-crafted financial plan is useless unless it’s implemented.
The implementation is where the value of advice is really unlocked.
Clients need support to make lasting changes to achieve their goals; that support is best achieved by a financial planner within the context of an active ongoing relationship.