That's a problem for future Olga

With Mark Pittaccio

How can we get more people to understand the importance of financial planning?

Making a financial decision is scientifically proven to be one of the hardest things a human can do.

The outcomes are in the future. The decision is highly complex, and we don't make these choices often, so we can't easily build up experience. And, because we're making money decisions, the emotional side of our brain gets involved too.

We can't get our heads around it, so we bury them in the sand instead.

That's not good for anyone and makes the job of a financial adviser harder.

So we got one of the UK's most sought-after behavioural economists, Mark Pittaccio, who works at leading wealth management company Quilter, onto the Upfront podcast to examine why this is - and what we can do about it.

Here's some of what he had to say. Listen to that episode in full here or wherever you get your podcasts.

When financial planning stops talking in product terms and starts talking about narratives, we will engage far more people.

How can we help more people understand the importance of financial planning?

I think the first thing to do is stop talking in terms of product. Nobody wants to buy a pension, but everybody wants an income when they don't want to work as hard. The fact is that everybody has a narrative for their lives. Everybody has a vision of what they want their lives to be and how they want them to turn out. And financial planning is a key component to maximising the opportunity of those things actually happening. That's the importance of financial planning. So the risk is not the risk to a number; it's the risk to that narrative. I think when financial planning stops talking in product terms and starts talking about narratives and the importance of good financial planning to maximise the probability of achieving that vision, we're going to engage far more people.

Do you think people make the wrong choices if left to their own devices?

I don't think so - I know so! People suffer massively from present bias, which is really powerful and stops us from making good financial decisions. Parting with resources that we own at the moment for our future betterment is not a natural thing to do. We want to look after what we already own. This is where experiments on loss aversion have been conducted, where we feel losses far more than we appreciate gains. So the pleasure of gaining £100, for example, is not equivalent to the misery of losing £100. The misery of losing £100 can be twice as miserable as gaining £100 can be joyful. It's the longevity of the financial planning process that's important, and we're not very good at it. The system of having annual reviews doesn't help - you're constantly reminding people that their values are going up and down. You'd be better off letting them invest and blindfolding them for ten years.

Annual reviews don't help. You'd be better off blindfolding people for 10 years.

How can behavioural economics help financial advisers do their jobs?

I consult with a lot of businesses that have applied behavioural science to the way they deliver the financial planning process and how they present choices to their clients. So explaining what risk is in very different terms - more about the narrative than the numbers. It's an emotional journey. We're in a client's corner to make sure that we use science, research and our knowledge to keep this narrative or vision for your life. Businesses that use this approach are proving to be much more profitable because clients are very engaged. They tend to give those advisers all their wealth to look after, and stay invested.

We feel losses far more than we appreciate gains.

If you are genuinely interested in people's stories, this is a fantastic profession to be in.

Tell us what you love about financial services.

The people I get to meet and those with client care at the centre of what they do. They are fantastic people. I've got huge admiration for them. If you're genuinely interested in other people's stories, this is a fantastic profession to be involved in.

What do you wish would change in financial services?

I would like regulation to have a better understanding of behavioural science and the fact that what we should do and what we're designed to do are two different things. Many compliance departments would say there's only one answer, and if you do it the other way, it's bad advice. Well, it isn't behaviorally if you're getting the client to behave in a way their future self won't regret. I'm not knocking regulators or compliance departments, but that side of the profession hasn't engaged an understanding of behavioural science that is benefitting advisers, that is allowing them the freedom to deliver the advice in the way that they feel is best for the client.

You could argue that there are two ways to deliver financial advice now.

Tell us about your research into the personality traits of financial advisers.

Yeah, the results raised some eyebrows because financial advisers are portrayed as this outdated, transactional, foot-in-the-door, highly extrovert cutthroat shark, but the research shows that successful advisers are nothing like that at all. They are emotionally stable and have a high degree of openness, which is the ability to embrace change. You could argue there are two ways to deliver advice - there's the 'I'm going to stand back and deliver this as an emotionally stable person in your corner' or the very empathetic way where you get into the shoes of the client and try to share their journey - which is something the research suggests women are far better at than men.

A good adviser should help clients empathise with their future selves, which is something we are very bad at.

The name of this episode (That's a Problem for Future Olga) refers to an episode of The Simpsons, which you use when talking about our future selves. Can you explain?

Ha ha, yes. One thing a good financial adviser should be able to do is to help clients empathise with their future selves, which is something we're very bad at. There's an episode of The Simpsons where Marge is castigating Homer, saying he's going to come to regret his current behaviour. And his answer is, 'Well, that's a problem for future Homer. Man, I don't envy that guy.' And if you think about it, financial planning is very much about saying, 'Look, let's part with resources today for your future betterment. Let's behave in a way today that your future self doesn't come to regret.' That's very difficult to do because we have this thing called 'the end of history' illusion where we look at ourselves and think we're the finished article.

Are there any tricks financial advisers can use to help people empathise with their future selves?

A face app where you age yourself is a really good way that some advisers use. So let's say you're talking to somebody in their mid-forties, and they're talking about potentially not wanting to work as hard when they're 60 or 65. Face app them to 65 and show them the picture on the phone. There's normally the laugh about what they'll look like, but then you say, 'You've woken up. This is you. What does your day look like?' And that visual representation helps them start thinking about their future.

The last word...

How do you see behavioural economics benefitting the industry?

We've done the number crunching, and those businesses that are doing it are a third more profitable than they were before. So there is a significant benefit. The way I see it, my job as a behavioural scientist is to help financial advisers help their clients make better financial decisions. The relationships that clients and advisers have when they have this better understanding of narrative and the behavioural biases that could scupper those plans are stronger and more meaningful - and often far happier.

Thanks to Mark for joining us on the Upfront podcast. For more insight into the role of behavioural science in financial advice and the research Mark is doing, listen to the episode in full here or wherever you get your podcasts.

What I love about financial services

Simply the people I meet in this profession and those with client care at the centre of what they do. They really are fantastic people. I've got huge amounts of admiration for them. If you're genuinely interested in other people's stories, this profession is fantastic.

Mark Pittaccio - Behavioural Economist