How many times have you asked yourself, ‘Why doesn't this client follow my advice?’ Maybe it happens after you’ve designed a great portfolio, one that's well-suited to the client's needs. Maybe it's when a client ditches a long-term plan designed to weather rough markets and instead pulls out in a panic.
You might have blamed yourself and tried to find ways to be more persuasive. You might have been tempted to doubt your clients’ sincerity (or worse, their intelligence).
The truth may be quite different. Clients often don't follow good recommendations for reasons that have almost nothing to do with your persuasiveness or their intelligence. Instead, it's because we’re all wired — investors, advisors, everybody — to do seemingly irrational things, especially with money.
Behavioral scientists have been studying these quirks of the mind for decades and have identified three main barriers that can lead clients astray. To summarize, clients need to:
Believe what you’re saying
Choose what to do
Actually do it
Each of these steps presents unique challenges.
Let's say you have a client who has asked for your advice and pays good money for it. Let's also assume you’ve done your homework, and you have a solid, well-thought-through recommendation. To keep things simple, we’ll use this example: You’ve constructed a well-balanced portfolio, but the client really wants to invest heavily in muni bonds instead. Why might clients like this one not follow your advice?
Barrier 1: Clients don't believe what you’re saying.
Sadly, having the right answer doesn't mean it will be believed. To use the example above: Your client has a strong predilection for an unbalanced, narrow portfolio. You counsel against it, but the client just isn't with you.
There are many reasons someone wouldn't believe another person, of course, so let's dispense with the obvious ones that don't apply here: lack of trust in you personally, lack of trust in your data sources or solid data that factually disproves your recommendation. Clients wouldn't be (or stay) your clients if these were a problem.
Again, we’re assuming that the recommendation is right for the client — based on their preferences and needs, and the realities of the market (if the recommendation isn't right, no amount of polish will help).
So what goes wrong? You know what's going on in your head, but do you know what's happening in theirs? Here are some tips:
‘Easy to think about’ equals ‘true.’ Things that come to mind easily, like vivid anecdotes (“my brother-in-law swears by muni bonds”), often feel more real and true to people, regardless of the evidence behind them.
Supporting evidence finds them. If an investor believes in a particular asset class, they will find information that supports that belief. That happens even if they are not looking for supporting information because their minds will naturally notice the information that supports their beliefs. So they sincerely have more supporting evidence than you do for their perspective.
The dangers aren't relevant for them. As investors, we believe that we’ll do better than others — we’re optimistic about our chances and about our own abilities. There's evidence that overconfidence increases with the complexity of the task (and yes, gender may play a role as well: Men may be more prone to this than women).
So when you try to dissuade your client of their chosen strategy and offer a surer path less fraught with danger, “Well, those dangers just don't apply to me.”
In the behavioral research community, we call these the availability bias, confirmation bias and overconfidence bias. The good news is that we have potential solutions for each.
Not surprisingly, simply telling people that they are overconfident or living in a self-confirming bubble doesn't get you very far. However, in a Finnish experiment, Markku Kaustia and Milla Perttula (see sidebar, “To Dig Deeper,” for more behavioral science resources) found that by sharing examples of how investors can fall prey to these biases, they could be counteracted (i.e., not blaming people, but describing how these challenges affect us all).
It's also worth pointing out that in this experiment, the investors were actually professional investment advisors. Remember, the challenges of overconfidence (and confirmation bias) are universal.
Another technique that researchers in a 2009 study found can help is to ask people to imagine the opposite of what they believe and then try to explain why that position is true. In our hypothetical case above, investors would be asked to argue why muni bonds are a bad investment rather than a good one. It gives investors a vivid, easily accessible argument to counter their existing one, and gets them thinking consciously about both sides.
Now, assuming that you’ve got their attention, and they believe what you’re saying, the next step is to get a commitment to act — to decide, “Yes, this is what I’ll do.” But that can be overwhelming.
Barrier 2: Clients are overwhelmed by the decision.
Often, we want to give investors reams of information about their investment options and our recommendations. Some clients may even ask for the details so they can look it over themselves. The challenge is that even when people ask for complex information, they often won't use it — at least not any time soon. In fact, the more information we provide, the more complexity and burden we place on clients, and the more natural it becomes for clients to delay making any decision.
There are two solutions to this problem. First, we can make the information easier to process. For example, a 2014 paper by Kittipong Boonme and other researchers at the University of North Texas found that a simple heart icon was more effective than detailed nutritional information in helping people make smarter food choices at fast-food restaurants. That doesn't mean that we should act like clients are dumb or uninterested, but simple presentation helps them process information.
The second solution is to provide information (and choices) in stages — give a broad overview, and let people dig into the details if they want to. With a portfolio recommendation, for example, you’d provide a clear and concise overview on the first page, with the call to action, and then make it clear that the rest of your detailed analysis is optional. Your detailed effort is clear, shows that you know what you’re talking about and doesn't require your client to set aside 12 hours to read it to understand your point.
Barrier 3: Clients don't act on it.
Finally, the most subtle and frustrating problems occur when people simply don't take action — i.e., when they look you in the eye, say, “Yes, I’m with you,” and then nothing happens. Behavioral scientists call this the intention-action gap, and it's where much of our research is focused here at Morningstar.
There's a great study that illustrates this intention-action gap. In examining employee savings decisions, James Choi and others found that only 14% of people who explicitly planned to increase their savings rate actually did so (and only 4% of people who wanted to save more, without committing to do so, actually did).
Why does this happen? Behavioral scientists have found that seemingly trivial details get in people's way. When we tweak these details, people do better. For example:
Simply checking a box on a form by default, versus asking people to check it themselves, can nearly double participation rates in employee retirement plans (Madrian and Shea 2001).
Simply reminding people of their intention to act can get their attention. In one study (Karlan, et al., 2010), sending specific letters or text messages to people who said they wanted to save more for the future increased success by 16%.
Asking people to jot down when they will take action, rather than leaving it up to them to decide later, can increase follow through. Milkman and others (2011) found that asking participants to write down when they would get their flu shots increased success by 13%.
These small changes matter so much because, again, we’re all human — we get distracted, we forget, we procrastinate, etc. Yet when we ask clients to take action, we assume that the grave importance of our recommendations will somehow overcome human nature. That just doesn't happen.
The Solution: Don't fight human nature — avoid it.
When we understand what specifically stops clients from following through, we can work around the quirks of human nature to help them overcome it.
First, figure out the top-level problem: Is it a problem of belief, decision or action?
Second, identify the specific obstacle: Are they procrastinating because you overwhelmed them with information? Do they have a vivid, emotion-laden anecdote in their minds that your calm, careful analysis can't compete with?
Third, try one of the techniques outlined here (or others from books like “Nudge” or “Predictably Irrational”) to help work around the problem. Remember, being more forceful or persuasive usually won't help. Human nature isn't going to change.
You’ve probably noticed that this approach entails a client-by-client, situation-by-situation perspective. There's no universal answer to why clients don't follow through on advice.
As behavioral scientists, we’ve identified the range of reasons why people might not take good advice and what you can do about it. Your expertise, and your detailed knowledge of your clients and their financial situations, makes all of this work.
By illuminating which particular challenge your clients face, you can help them make better financial decisions and avoid the pitfalls of their human nature.
--- Check out Economists Can Tell You What You Should Want on ThinkAdvisor.