Finding the right nudge for your clients

Advisers are using insights from behavioral economics and social psychology to steer people's decisions in a direction that should benefit them.

“First, never underestimate the power of inertia. Second, that power can be harnessed.”

—​ Richard H. Thaler, Nobel Laureate, behavioral economist

Client perceptions of a financial adviser’s service are ultimately determined by how effectively it delivers to their personal financial objectives or long-term lifestyle goals. As financial advisers’ role evolves more and more into that of a financial life-coach, advisers need to build strong client relationships and foster trust.

To add value to their services, some advisers have begun to “behavioralize” their work by helping clients make better financial decisions. One approach to achieve this objective is to educate clients about investment errors and pitfalls in an attempt to de-bias their thinking and choices.

Another, complementary way that has gained in popularity in recent years involves nudges. This approach utilizes insights from behavioral economics and social psychology to gently steer people’s decisions in a direction that should benefit them.

An effective and well-known nudge is that of automatic retirement plan enrollment, but there are many others (see table). Recent developments in behavioral science suggest that there are limits to one-size-fits-all nudge applications due to demographic differences, such as income, or psychological differences, such as individual beliefs.

Financial advisers have the opportunity to influence their clients’ decisions more effectively by taking into account clients’ unique backgrounds and circumstances.

Nudges are designed to enable good decisions by either tackling or working with different decision problems (see table), which can be divided into three broad categories — inaction, uncertainty and impatience:

1. Inaction refers to a failure to act due to status quo bias, inertia or procrastination.

2. Uncertainty is a subjective state resulting from limited knowledge.

3. Impatience is excessive focus on the present time, impulsivity or a lack of planning.

Nudge Examples Works best for
Defaults Inaction, Uncertainty
Ease & convenience Inaction, Impatience
Feedback Uncertainty, Impatience
  • Refocus on the long term after a market downturn or on the overall portfolio after the decline of a specific position.
  • Emphasize investment losses or gains to counteract over- or underconfidence, or excessive or inadequate risk-taking
Impatience, Uncertainty
Planning prompts
  • Ask to make and articulate concrete plans (when, where and how) to manage their finances
Inaction, Impatience
Pre-commitment Inaction, Impatience
Social norms
  • Injunctive norm: “[People like you] should contribute 16% of their salary to their pension fund.”
  • Descriptive norm: “90% of my clients have taken advantage of this offer.”
Uncertainty, Inaction
Simplification Uncertainty, Inaction
Timely reminders
  • Send reminders (text, email, etc.), reaching people when they can quickly act on information
Inaction, Impatience

Examples of behavioral problems that advisers may encounter among clients include status quo bias (inaction) in relation to portfolio reviews or rebalancing, clients wishing to sell their holdings as a result of a market downturn (impatience), and home bias — a disproportionate preference for domestic equities (uncertainty).

While inaction, uncertainty and impatience are relatively universal issues, different types of people should be more susceptible to particular problems. Advisers can rely on a combination of data sources to better understand their clients’ proneness to behavioral problems. These include both objective factors, such as demographics and past investment behavior, and subjective factors, which can be gleaned either from conversations with the client or more formal psychological assessments.

Individuals who are busy, prone to form strong habits or have high levels of regret aversion, for example, may be particularly likely to suffer from a failure to act. Individuals with low levels of education or knowledge in a particular domain, such as financial literacy, are most vulnerable to uncertainty. A person’s cultural background and dispositions, such as uncertainty and ambiguity intolerance, can aggravate subjective uncertainty. Very young and old people tend to have higher levels of impatience. Negative life events or conditions, such as financial hardship, can also increase impatience due to a reduction of mental bandwidth and a focus on immediate needs.

To find out which nudge works best for a particular problem and client, firms and even independent advisers can employ simple, cost-effective experiments with test and control groups.

You can implement nudge techniques throughout the client journey by identifying touch points and opportunities for behavior change before tailoring your communications accordingly.

In 21st century financial advisory, personalization is king. You can take this practice to the next level if you work with a nudge that fits not only the problem, but also your client.

Alain Samson is chief science officer of Syntoniq, which provides behavioral assessments for financial advisers and employers, and Prasad Ramani is Syntoniq’s chief executive officer.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print