Amanda White writes that planners could do well to observe some of the work and personal traits of a late, great rugby coach.
Some consider that Jack Gibson was the ultimate coach, not just in football but also in life. Gibson’s philosophy, which was initially revolutionary but eventually influenced every coach who was to follow, was simplicity.
Indeed, visiting Buddhist and French interpreter to the Dalai Lama, Matthieu Ricard, who specialises in training the mind to achieve genuine happiness, believes simplicity is the key.
But how does this translate when things aren’t simple, as is the case with a lot of financial products and financial decisions? What do you do when decisions are hard?
Barry Wyatt, national manager, business development for Axa, believes planners still need to focus on very basic, simple messages.
While it is commonly held that investors buy at a peak and sell in a trough, Wyatt has put data around this so planners, and their clients, can see the effects of their actions.
‘By moving into cash, those investors experienced an 18 per cent difference in returns’
Looking at Plan for Life data in 2003, the last time there was a real trough in Australian equities, he found that there was negative funds flow from Australian equities into cash just as the market hit its all-time low.
The effect is debilitating. By moving into cash, and staying there for only six months, those investors experienced an 18 per cent difference in returns. In dollar terms this means a $100,000 investment was converted into $211,000 instead of $248,000 if the investor had not moved out of equities (see graph).
“This is a huge difference in return,” Wyatt says. “And we can put it down to our behavioural instincts switching into survival mode.”
Wyatt is currently on the road with planners educating them on behavioural finance, so they can then bring these examples to the attention of clients, in a bid to help communicate that superannuation is a long-term investment and, to some extent, is best not tampered with.
Planners can learn from the rugby league super coach, the message is about simplicity.
“These are still very basic messages, that super is for the long term,” Wyatt says.
“As a human race we have only been investing for the past 20 or 30 years, before that retirement income was in defined benefit schemes or people died before retirement age. Our ancestral brain is not very well evolved when it comes to investing.”
Arun Abey, co-founder of ipac, says traditional decision-making theory is based on people making decisions about things they understood.
“The mistake it makes is it assumes all decisions are easily understood. But what happens when they are complex, like with insurance?” he says.
Behavioural finance has given insight into how people make decisions with complexity, and generally the outcomes are bad.
Leading authority on behavioural finance, Professor Schlomo Benartzi, who was brought to Australia recently by Axa, believes planners and product developers should not assume investors should “get it”.
“Investors don’t understand basic things like compounding,” Benartzi says.
“Why should people get it? Finance products are not simple, there are so many of them. What we need to be looking at is how we can use our knowledge to help consumers save more tomorrow.”
Benartzi has a special interest in consumer finance and participant behaviour in defined contribution superannuation plans. He is also co-founder of the Behavioural Finance Forum, which is a collective of 30 prominent psychologists, consumer behaviour experts and behavioural financial economists, as well as 30 major financial institutions. The forum’s mission is to help consumers make better financial decisions by fostering collaborative research efforts between prominent academics and industry leaders.
One of the seminars presented by the forum – by Benartzi and fellow academics, Sheena Iyengar from Columbia University and Alessandro Previtero from UCLA – questioned the effectiveness of current communication practices which present information to consumers in a cognitively-focused style appealing to an investor’s rationality through tables of figures.
They said that generally people operate in different modes: cognitive or deliberate, which is controlled, rule-based and analytic; and intuitive or affective, which is automatic and holistic.
Testing these two areas and their effect on savings rates, they quoted an experiment where fully-employed MBA students were presented with a hypothetical retirement plan and asked to indicate their intended saving rate.
Savings rates were displayed as either the amount of money they would accumulate by retirement, or, images of apartments in London they could buy at retirement. The results were that savings rates in the cognitive version averaged 10.9 per cent, while in the affective version they were 14.5 per cent.
Benartzi and his contemporaries believe the application of this visualisation and the effects it may have on mutual funds, mortgage loans, annuities and risk tolerance questionnaires is something planners and product providers should consider.
“Affective appeals show significant potential for motivating consumers’ financial behaviour,” they conclude.
Certainly Abey believes giving people information is not enough to change behaviour.
“If giving people information was enough to change behaviour there would be no obesity. How do you change behaviour? By linking with something really important to people,” he says.
“Advice needs to be given in the context of what is really motivating for the person. The ability to engage people emotionally, and the skill set to do that is a key implication. We need to consider the important skills of planners on the emotional side and the impact of effective communication versus numbers and hard facts.”
Indeed the role of the financial planner is changing. Now planners are becoming investment coaches and, to some extent, life coaches.
They need to have the skills to challenge clients to think about the long term, where they want to be, and what their risks are.
In doing that, the planners’ skill set is shifting towards personnel and management skills, including motivation, and communication. Perhaps Benartzi’s research is a tip for how to do this, using communication that appeals to the layperson and crosses boundaries.
Gibson had another trait that all walks of life could do well to adopt. According to Terry Fearnley, a Roosters teammate in the 1950s and a coaching assistant to Gibson in the 1970s, Gibson was always willing to learn. He was always looking for things to give his team an edge. And he looked outside the norm, helping to introduce tackle counts, regulated weight training, more scientific fitness assessment, and video analysis.
Like Gibson, planners are on a continual learning curve. And there are tools that can help them in their task, if they are willing to adopt them.
A focus on communication, rather than sales, is one way to do that. And one of the key components of good communication is simplicity.