How behavioral technology will improve retirement planning

As tech starts to track what clients actually do, report back and personalize their experience, planning processes and the client experience will advance

Apr 12, 2019 @ 2:59 pm

By Jamie Hopkins

Technology has always been the great disrupter. When robo-advisers came around, traditional advisers began preparing for battle. Now financial advisers are largely embracing technology, using it to free them up to be a better adviser. But technology isn't done evolving. The tech you have today is most likely more of a starting line than a finish line.

Financial services is notoriously behind the times when it comes to technology. Does it strike anyone else as strange that social media, phones and cars have far superior technology than what we use to plan out someone's retirement income or college education payments?

In part, some technology developers and companies have shied away from financial planning because of the heavy regulations. However, these technology investments and developments are coming. So the question now is: How will the next generation of financial planning tech look?

(More: Customized advice coming to households near you)

To be sure, it won't just be about building retirement plans that sync up with Monte Carlo simulations, back-testing and tax laws. Most retirement planning software today seems to be geared more toward the adviser and less about driving better behavior or outcomes for the client. While modeling a retirement plan is essential, the next generation of adviser tech will be focused on achieving better client outcomes and finding what actually works, not just implementing what the adviser thinks should be done.

The medical world went through a similar transformation. In the past, medical recommendations were driven primarily by the professional, not best practices. That's why "second opinions" have always been so important, since three doctors might give you three different approaches to the same issue. Research has shown the same to be true with financial advisers.

As our technology starts to track what our clients actually do, report back and personalize their experience, the planning process and client experience will improve by leaps and bounds.

(More: How can advisers continue to differentiate in an increasingly digital world?)

Just think about if your technology tracked how often your client logged in to check their investments and correlated that with where the market was on that day. The software could also realize that after every 2% drop your client logged in 90% of the time and changed some investments. Or, if a client got a raise, the software could pick up on that from their payroll being fed in and ask if they wanted to start saving an extra 1%. The possibilities are almost endless.

The combination of better technology, better data and better tracking allows the software to become personalized. "Personalization" has become a popular term in the behavioral finance community lately because it has been shown that personalizing messages, nudges and processes can help individuals achieve better savings outcomes.

Another area that will vastly improve is risk-tolerance technology. Today, many experts — like Shlomo Benartzi, professor at UCLA Anderson — believe the current tools don't do a great job at truly gauging risk tolerance. In a recent behavioral finance program held at UCLA, Mr. Benartzi said that after clients go through these risk-tolerance questionnaires, many advisers have no idea what to do with the information.

As a result, he helped develop a loss-aversion calculator that might provide insight into a better way to gauge a client's risk tolerance. The tool tracks different gambles and how someone responds. In the end, it measures their risk tolerance as aversion to loss as compared to attraction to gain. This also can be tracked to how they experience loss and gain compared to the average person.

Technology is beginning to advance, which should allow advisers to better combine behavioral finance best practices into their own processes in order to achieve a true evidence-based approach. Instead of merely saying, "I think my clients are more worried about the market this year," we will be able to affirmatively say, "My clients are logging into their accounts or changing investments more this year than last."

The intersection of behavioral economics and technology is really the next game changer for personal finance and retirement planning. Are you ready to get in the game?

Jamie Hopkins is director of retirement research and vice president of private client services at Carson Group.


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