Behaviour that Costs Clients Money
Printer-Friendly Version
« The profitability of business ethics ~|~ Important new research — Talking to Seniors About Volatility »
Tweet
Email This Article
Go to ... Page 1 | Page 2 |
Behaviour that costs clients money
There’s growing research that demonstrates that investors aren’t rational and that their irrational behavior costs them big money over time.
One of the leaders in this area is Duke economist Dan Areily, author of the bestselling book Predictably Irrational — last week we talked just before his kickoff speech at the CFA Institute annual meeting in Boston. Our conversation can be viewed on today’s email.
Advisors who understand the natural biases in individual behavior can frame questions and provide advice that will steer client decision-making process in a more rational — and economically better — direction.
The following is drawn from an article by Bob Huebscher, publisher of online newsletter Advisor Perspectives, reporting on a talk that Ariely delivered last fall. (If you want to receive Advisor Perspectives, you can sign up at no cost at www.advisorperspectives.com.)
Setting up automatic behavior
One example is understanding the power of having inertia work for you by automatically setting up desired behavior.
Ariely showed why organ donor participation rates are strikingly different among European countries that on the surface look similar — Belgium and the Netherlands for example.
Those countries that present an opt-out choice (e.g., “check this box if you don’t want to participate in the program”) have far higher participation rates than those countries where participants have to check a box to opt-in; Canada falls into this latter category.
What advisors can do:
Advisors can take advantage of default decision making by setting up an automatic savings plan, where a certain amount is contributed from a client’s account every month unless they do something to change this.
Or another example is getting clients to buy into automatic rebalancing, so the default decision is the one that will serve clients well.
Presenting a manageable number of choices
Ariely also points to an experiment to illustrate the impact of the number of choices that clients are presented with.
Shoppers in a supermarket were offered the chance to try different jams at a table set up when they entered a supermarket.
In one scenario there were six different jams on the display table; in the other there were 24.
The researchers recorded the percentages of people that approached the tables, tried the jams, and purchased a jam. Where there were six jams on the table, 40% of people approached a table and 30% ended up purchasing a jam, so 75% of those who tried the jams bought a jam.
Where there were 24 jars of jam, 60% of people approached the table, but only 3% purchased a jar of jam — so only 5% of those who tried the jams purchased.
By limiting choice, you ended up with ten times more purchases. Overwhelming shoppers with 24 options totally negated the enticing effect of offering a free sample.
Go to … Page 1 | Page 2 |
Latest AdvisorAnalyst Practice Growth Stories
About ClientInsights.ca A breakthrough in client communication Not long ago, clients read what you sent them. Today that's changed. In the You Tube world we live in, many investors would prefer to hear from a portfolio manager directly. And instead of reading an article on tax saving or estate planning strategies, more and more Canadians would rather watch an expert discuss the topic. Clientinsights.ca was developed in response to these changes - to deliver information in the form that investors want to receive it. It provides over 150 short video interviews, each about 4 to 6 minutes - you can email them or watch a video along with clients to start a meeting. No matter how you use it, Clientinsights.ca is designed to help you take client communication to a higher level. Dan Richards Founder and CEO, Clientinsights.ca Read more from the author/contributor here.
Tags: Automatic Behavior, Bestselling Book, Cfa Institute, Compendium, Decision Making Process, Defaul, Donor Participation, Economist, Email, European Countries, Inertia, Irrational Behavior, Kickoff, Latter Category, Natural Biases, Organ Donor, Participation Rates, Rebalancing, Target, Time One
Posted in My Practice| Comments Off
