Advisers face the challenge of working out what their clients really want from their investments and life, rather than what they simply say they want.
A new accredited training program and tools will help advisers use cutting-edge science to understand the difference and significantly improve their client profiling.
PortfolioConstruction Forum (the Forum) has struck a strategic partnership with US-based financial technology company, Capital Preferences, to roll out content, training and tools focused on advisers understanding client “preferences”.
The Forum’s publisher, Graham Rich, says the alliance will allow advisers to tease out what clients’ true investment preferences are, and then better tailor advice and portfolios.
Each client has a stated set of preferences intuitively wired into them around investments, Rich says. Most client profiling uses stated preferences. The problem is that there is a difference between what clients say their preferences are (stated), and how they actually behave (revealed).
“What a client says they would like and how they actually behave are different,” he says. “Figuring out what all those differences are is a ‘complete science’.”
“If you can understand as an adviser how to probe and discover the difference between ‘stated’ and ‘revealed’ preferences in your clients, you’re going to have a better long-term client engagement.”
Rich says Capital Preferences are experts in the field of preferences, which he says are “a little wider than risk tolerance” and include things like risks a client is comfortable and uncomfortable with, but also lifestyle outcomes they’re comfortable and uncomfortable with.
Stated and revealed preferences
It is common for stated preferences to have nothing in common at all with revealed preferences, Rich says. Capital Preferences uses the example of people rating from 1 to 10 how they value dolphins. Most reply 8. But when they are asked how much money or time they’d invest in dolphins, the typical answer is none. “So their stated preference is that they really, really like dolphins but their revealed preference from their choices is that they cannot care less about dolphins,” Rich says.
“The important point is that revealed preferences are the only ones that can be proven with statistical confidence,” Rich adds. “What people say about their preferences isn’t a reliable reflection of what they actually prefer.”
Quantitative advice methods program
The partnership between the Forum and Capital Preferences will provide the content, education and tools needed for advisers to discover those differences, then implement the findings through client engagement and advice.
Capital Preferences will deliver content to the Forum from the world’s top academics in the space, including Shachar Kariv, chief scientist, co-founder and chair of the Economics Department at the University of California Berkeley.
The Forum will become the official accreditation provider of Capital Preference’s quantitative advice methods program, which will be aimed at financial advisers in Australia and New Zealand.
The program will be available to all portfolio construction Practitioners. Accreditation is a one-day workshop and some follow-up study online. The fee is yet to be released.
Rich says the Forum will be inviting professional associations such as the Financial Planning Association of Australia, the Association of Financial Advisers, the Investment Management Consultants Association and the Association of Superannuation Funds of Australia to recognise the accreditation for their members. “There are very few, if any, accredited programs focused on behavioural economics and engaging effectively with clients,” he says.
The partnership and new program were “influenced in a sense” by the government’s new adviser education requirements, Rich says. But he says that with 15 years of delivering continuing education programs, the Forum has been a leader rather than follower in adviser and investment education, and the government’s requirements will recognise the work Forum members do.
After they complete the accredited program, advisers will also get access to a suite of tools that help them carry out “preference profiling” of their clients and that will help them clarify their stated and revealed preferences. The reports generate a client’s “economic fingerprint”, including scores on risk aversion, loss aversion and ambiguity aversion.
The preferences education program forms part of the Forum’s “finology” discipline, which has the objective of helping investment professionals, including advisers, communicate their specialised knowledge and engage with clients.
Capital Preference’s chief executive officer and co-founder, Bernard Del Rey, says client profiling is a notable weak spot in the investment advice process globally and in Australia. “There is no science behind understanding clients,” he says. “We aim to fix that.”
(Continues below.)
[tv playlist=’55a4af5c150ba0e92e8b459c’ theme=’pp_article’]
Expansion to Australia
Del Rey says that stated preference-based questionnaires, like ones used in Australia now, don’t provide a “statistically verifiable measure of someone’s decision-making quality, risk, time or distributional preference”.
“They are not a worthy benchmark to study or try to replicate,” he says, adding that firms make the situation worse by adding “invested scoring systems” which give a false sense of confidence in their methods.
Del Rey says he is very impressed with many of the advice and superannuation players here in Australia. “Overall there is strong focus on making the financial advice experience more robust,” he says. “However, some players are clearly grasping at old models or spending money in areas that ultimately will not produce a robust and scalable advantage.”
Australia was a natural place for Capital Preferences to expand its firm “having already reached worldwide academic validation out of the US and after winning global fintech competitions emanating from Asia and Europe”.
Del Rey says the Forum is the “ideal partner” with which to launch its quantitative advice methods curriculum later this year. “We want to bring a practical and applied education program to Australia to help advisors harness advances in game theory, econometrics and computing power,” he says. “The advisor of the future will have far better tools and education then they have today and the Forum continues to work toward that same objective. With the Forum’s help we will be a key player in putting these new and more relevant resources at their fingertips.”
Rich says if advisers can get a deeper sense of preferences it helps the adviser understand their clients better. But it will also help the client understand themselves better and the adviser will be able to deliver fit-for-purpose advice that’s better suited to clients.
