The primary goal of using behavioral finance principles in your practice is to “positively manipulate behavior on a subconscious level,” Darrin Farrow said on Monday at the 2011 Center for Due Diligence conference in Chicago.
Farrow, principal at Rehmann Financial, used questionnaires as an example of where advisors can improve their behavioral finance process. Most questionnaires are written above the average client’s level of understanding; investors would rather do nothing than something they don’t understand, Farrow said.
Dorann Cafaro, general partner and principal at Cafaro Greenleaf, hinted that participants’ responses may not always be reliable anyway. Their behaviors are driven by the moment, she said. Even if they say they want to save, when the time comes for action, they’ll hesitate.
For example, if you offer them a chocolate bar and an apple, she suggested, many will take the chocolate bar right away. However, if you ask them whether they’d prefer an apple or a chocolate bar, most will say they would eat the apple.
Data from Diversified Investment Advisors seems to support the conclusion that what participants say they will do and what they ultimately do are not always the same.
Patricia Advaney, senior vice president of participant strategy at Diversified, said that in a survey by Diversified, 69% of participants said they would stay in a retirement plan after auto-enrollment and increase their savings. However, just 18% followed through. Likewise, while just 25% said they would stay in the plan at the automatic 3% deferral rate, 68% did so.