This is a quest post by DANIEL EGAN. Daniel is Director of Behavior Science and Investing at the US robo-adviser Betterment.
First, pictures! Please reflect on these a moment.
Each sign is well intentioned.
Each sign is also unintentionally exacerbating the problem it’s trying to fix.
I don’t believe the creators intended for them to be ineffective. But I’d also guess they weren’t being judged on how effective they were on changing behaviour. More likely, they were being judged on if they’d ‘done anything’, or ‘told people’, or ‘warned them’. And that’s the problem.
Sometimes, appearing to be a good adviser works in direct opposition to actually being an effective adviser.
Paying more for incompetence
Dan Ariely tells a story: a locksmith is an apprentice, and unskilled at picking locks. It takes him a while to get people into their homes.His time and effort were evident, so clients tip well.
As he becomes more skilled, he gets people into their houses quicker, with less effort. But his tips go down, because his skill makes it seem quick and effortless.
"Our perception of value is often not about what we’re getting, it’s about how much effort the other person is putting in. [When skill is involved] we get paid for incompetence."
Our use of visible effort as a proxy for success means we pay for incompetence. We’re so focused on whether or not someone is trying hard, we don’t stop to check if they’re being effective or skilful. A for effort is truer than you think.
If we want to reward effective advisers, we need to check empirical evidence of improving outcomes. If we judge advisers for effort in performance art (“I got down on my knees and told them not to sell!”) rather than outcomes (“They didn’t sell!”), we might be rewarding ineffectiveness.
There are good caveats to this I’ll discuss later. But first there is an elephant in the room.
The role of regulation and the problem with disclosure
There is a third wheel in the adviser/ client relationship: regulators. And much of what the advisers says (medium and message) may actually be optimised for appeasing the regulator.
For decades the regulatory principle in the US has been one of disclosure: if you disclose fees, conflicts of interest or other key facts, you are in the clear. This prevents outright deceit… but it also leads to long small print disclosures written in legalese which you can’t pay people enough to read.
It’s the equivalent of those signs. “Look, I told them!”. But disclosure can backfire:
People generally do not discount advice from biased advisers as much as they should, even when advisers’ conflicts of interest are disclosed. source
Disclosure… can also increase pressure to comply with that advice if advisees feel obliged to satisfy their advisers’ personal interests… increased pressure to comply with advice is reduced if
(a) the disclosure is provided by an external source rather than from the adviser
(b) the disclosure is not common knowledge between the adviser and advisee
(c) the advisee has an opportunity to change his/her mind later
(d) the advisee is able to make the decision in private. source
So, my spidey-sense tingled when the SEC released guidance on robo-advisers, and started using the word ‘effective’:
robo-advisers may wish to consider the most effective way to communicate to their clients the limitations, risks, and operational aspects of their advisory services.
… We therefore remind robo-advisers to carefully consider whether their written disclosures are designed to be effective source
This focus on being effective is new. If taken as gospel, it would mean it’s now not sufficient to throw a disclosure with nine-point font at a client. You need to consider if the client is absorbing and acting in a way that reflects a true understanding. That’s a much higher bar.
That seems to be saying we need to look at empirical outcomes, and evidence. It’s part of why we tried to help improve SEC disclosures to be more effective.
But, we also have another option for being effective: behaviour design.
Unfortunately, it’s less visible and therefore less valued.
The invisible doctor
The Save More Tomorrow plan is probably the most cost effective and impactful improvement to retirement policy in my lifetime. It increased employee retirement participation from 2 in 10 workers to 9 in 10 workers.
The average savings rate went from about 3% to 14%. It costs almost nothing to implement.
Now think about individuals who had their savings rate increased by Save More Tomorrow: they probably had zero idea that it influenced them. They expended no effort, were completely unaware of the plan sponsor or the research. Yet they saved much more. Awareness of the guidance is not necessary for it to be effective.
So I am left with a problem: often, if I’ve been effective in changing the behaviour of people, they don’t know it. The evidence is there: it comes from trials, from significant difference between those who received the guidance and those who didn’t. My manager and company knows it, but each individual client is unaware that I’ve magically, with no effort from them, helped them out. Unless they read blog posts, which seems a bit excessive.
The locksmith had it easy, man.
So, what should we do? Perhaps have a national database of ‘adviser report cards’ similar to records kept on surgeons? How will we adjust for advisers who take on more ‘tough’ clients, and advisers who shy away from them?
Here is Michael Kitces on who is responsible when a client won’t adhere to a plan:
"In fact, many financial planners experience frustration when clients won’t act, and view the failure of clients to implement recommendations as a sign that the people must be “bad” clients. The implication is that it may be more productive for planners to seek out “good” clients instead – those who act promptly and see the value in the planner and his/her advice.
"A greater responsibility may rest upon the professional practitioner to help clients, regardless of where they happen to be in the process of change, to move forward. In turn, this means that it may be time for financial planning training to be improved, to develop the understanding and skill-sets necessary so that planners can not only inform clients of what needs to be done to improve their financial situation, but also help motivate them to actually do it!"
I love this idea. Still, I worry.
We need to make the invisible visible, to show clients how we’ve helped prioritise their goals, or curb un-joyful spending, or saved on taxes.
If clients are unaware of how you’ve helped them, all that training might just be charitable work.
And if you’re a client, and you’re focused on how many emails your adviser sends, or how many times they trade, you might just be paying for effortful incompetence.
Thank you to Daniel for allowing us to republish this article, which was first posted on his blog. You can follow Daniel on Twitter at @Daniel_Egan.
Daniel will be giving the keynote address at Humans Under Management in London on 1st November — an even at which I’m going to be speaking myself. When last I looked, there were still places available, so if you haven’t yet done so, go ahead and book.