Hi, I’m Damon Riscalla and I’m here to bring you the Betashares Practice Management Series.
So I’m here today with Simon Russell from Behavioral Finance Australia, and this is a topic that I find absolutely fascinating. So Simon, firstly, thank you so much for joining us today. I don’t want to steal your thunder so I’ll let you do it, but can you tell me a little bit about your background and what you do on a day-to-day basis?
Sure. Okay, so behavioral finance is my thing. So behavioral finance is the psychology of financial decision making. So I’ve got a background in psychology. My first degree, undergraduate degree was in psychology, and the rest of my studies and career have been in financial services and investments. So what I’m doing now is I have a business focused on how can we use the research around the psychology of financial decision making to help super funds, asset managers and financial advisors.
So on a day-to-day basis, if you look at the advice part of that, it’s presenting at conferences, running workshops, talking at off sites. For example, there’s a training piece. We’ve got some online tools and stuff that people advisors can use, and there’s a consulting piece. So people might say, “Well, how can you use this? How can we put this into our advice documents to make them more engaging? Or we’ve got a new price change coming through, how should we communicate to clients? Or we need to write some articles.” So there’s a whole bunch of things I guess that I’m trying to… It’s all around the psychology of financial decision making, but how do you then apply it and help advisors use it with their clients?
And talking about psychology, one of the things that comes into that, I guess, is motivations. And when we think about that from a financial planner’s perspective, how would a financial planner perhaps help motivate their client to achieve their goals? But then along that path, I guess there’s trade-offs that need to be made. How would an advisor help the client go through and make those trade-offs?
Yeah. I think it’s a fantastic question because those trade-offs are everywhere. So they are, should I spend more time at work for which I might get more chance for promotion, more pay rise? Or should I spend that time with my family, for example? Should I spend now versus save and spend in the future? And even when I spend now, should I buy that new car? Or should I go on my overseas holiday? So that you’ve got all these trade-offs, and I think from an advisor’s perspective you can look at that and go, “Well, that’s hard for me to talk to my clients about, because they’re subjective and it depends on their preferences and their values and all that sort of stuff.” For which I would say, “Yeah, yeah, that’s completely true. It does depend. Some people might like the car versus the holiday. That’s true.”
However, we do have quite a bit of research now around the types of things that lead to subjective wellbeing, if you like, or happiness or positive emotions. And so for example, if you look at that income versus time trade-off, should I spend more time at work, for example, for higher income versus at home? Or even should I spend money to get someone to mow the lawn so I don’t have to mow the lawn? So there’s those time versus money trade-offs there. So what does the research tell us? Well, it tells us that you get this curve of happiness for income where probably people have heard if you get to a relatively modest or medium/moderate level of income, maybe in the order of a $100,000 or thereabouts, well your level of happiness tends to peak at that level and doesn’t tend to improve.
Having said that, it depends on how you measure it. So sometimes if you look at those studies, what they’re doing is you might have on your phone a little app might beep at you and say, “How happy are you right now?” And I have to get my phone out and go, “Oh yeah, not too bad. I’m doing this interview. It seems like it’s going okay. Fine, I’ll give it a seven.” Whatever. All right. And then an hour later I get another beep at more random time and I’m doing that. So if you measure it that way, that’s in the moment subjective wellbeing, it doesn’t really matter if I’m earning $150,000 or a million. It doesn’t really make much difference. I’m still going to answer those questions the same. But if you ask me, “Hey Simon, how do you feel about your life overall?”
If I’m earning a million bucks, I go, “Oh, well that’s pretty good.” So it depends on how you measure it. But I think the point here is that advisors shouldn’t be, I guess, railroading their clients into goals without really the client’s goals. However, we can look at some of that research to try and help, I guess, nudge or guide clients towards the types of trade-offs that tend to work for most people. Or you can understand the circumstances which they’re more likely to work. So that’s the stuff I think advisors can perhaps use some of those pieces of research for.
Absolutely. One of the other things that I found really interesting is when advisors are talking to clients, the whole advisor client relationship is really built on trust and commitment. The client trusting the advisor and clearly the client having the commitment to follow through with and implement a financial plan. I think most advisors think that they have that nailed, but there may be some evidence that suggests otherwise. In your view, how would people tighten up and improve that trust and commitment element?
Yeah. Well let me say, first off I completely agree. I mean, trust underpins advice in so many ways. If the client doesn’t trust their advisor, they’re not going to open up, they’re not going to disclose information, they’re not going to rely on the advice, they might not become a client in the first place. And that impacts the client, of course, if they don’t get the advice, don’t take the advice, don’t get the outcomes and impacts the advisor. So it’s pretty critical to get it right.
So following through with your question then about, are advisors really as trusted as they think? And yeah, there is some evidence to suggest, well, maybe they’re not, but again that evidence is a bit nuanced. So if you were to look at, do people trust advisors? So if you ask me, well not me, but if you ask the general person on the street, do you trust financial advisors? You wouldn’t get such a great answer.
And it’s because people often have incorrect perceptions about advisors. They listen to what they saw on A Current Affair the night before or whatever. It’s all… Fine, we don’t think much of advisors as a general population. However, if you ask people, what do you think of your advisor? Oh, you get a much better response. So there’s a disconnect at that level for a start. The individual advisor tends to be more trusted than the category of advisor. But then if you ask clients of a particular advisor, how much do you trust your advisor? And then you ask the same advisor, how much do you think your clients trust you? And then you compare those two sets of results, well, you get a lower response from the client than you do from the advisor. So there is a gap. The advisor can overestimate… On average overestimates, at least from the research, overestimates how much their clients trust them.
Okay, so if that’s the problem, if there is a bit of a deficit between how much a client actually trusts their advisor and how much the advisor thinks the client trusts them, what can they do? Well, there’s a heap of things. And I go into some of these things in one of my books but, for example, a client might trust their advisor because they trust their expertise. You’re my advisor, I trust you because you know what you’re talking about. This is your space. And what we know from the research around expertise is it is very hard to judge. So there are some things that can help. Education helps, experience helps, but sometimes they don’t. So it’s a bit murky and what we know is that when we are given difficult decisions to make, not just on an advice and not just on trust, but just generally, what do we do? We look for simple decision making shortcuts.