- 3-Minute Article
- Aug 23, 2017
How to Manage Clients’ Preconceptions about Financial Products
Professor Victor Ricciardi discusses how preconceptions about financial products can influence your clients’ decisions.
In previous articles we have discussed natural, built-in tendencies, called biases, and mental shortcuts or assumptions that our brain uses to reduce the amount of work it has to do, called heuristics. Both biases and heuristics can have an influence on the decisions we make about financial matters.
In this article, we are going to look at how biases and heuristics may cause some clients to form views about financial products that prevent them from seeing the potential benefits.
These are the representativeness heuristic and the familiarity bias.
What it is
- The tendency to rely on stereotypes to make decisions, while disregarding other potentially useful information.
How it works
- The brain saves itself effort by assessing how much a situation or product represents something it has encountered in the past.
- It then uses this representation to help make choices in the present.
A client may have formed a negative perception of annuities in the past. The client may then use representativeness to make a decision about whether or not an annuity is suitable for them now, instead of assessing each individual product on its merits. This may cause them to miss out on the benefits some products could offer them.
What it is
- The tendency to assume that you understand a product or situation simply because you have heard of it before.
How it works
- The brain simply sees things you have encountered before more clearly and gives them more weight.
- This feeling of familiarity is an illusion that can have a significant impact on decision making.
It may cause some clients to stick with products they know at the expense of creating a well-diversified portfolio. As with representativeness, this may mean clients are disregarding important information and potentially missing out on the benefits some products could offer them.
MANAGING REPRESENTATIVENESS AND FAMILIARITY
Focus on needs rather than products. Focusing on products first can allow a client’s preconceptions to limit their choices before you have had a chance to explore all the options. Consider putting aside any discussion of products until you have worked with your client to understand their needs for retirement. In this way they can understand how a specific need can be met by a specific product before any preconceptions can come into play.
Focus on diversification. Consider helping your clients understand the importance of a diversified portfolio, explaining how different products perform different roles. Allocating money evenly across a diversified portfolio helps manage complexity and limit the emotional aspects of investing.
Focus on creating familiarity. By taking the time to educate your clients about new products and brands, you can make the unfamiliar familiar. Share credentials and examples to help build confidence and consideration.
Understand your clients’ preconceptions. Discuss any preconceptions you encounter in your clients and try to understand where they come from. This will give you insights into how to manage or overcome them.
Improving your clients’ decision making takes time, patience and commitment. If you want to help them understand their preconceptions and promote a more balanced approach to decision making, it is vital to start by building strong, long-term relationships with your clients based on trust.