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Behavioural focus will boost advice experience

Advisers can use behavioural finance principles to help their clients feel more satisfied with the services they provide and more willing to pay for advice, an expert in the area has said.

Clients feel the pain of losses far more than the satisfaction of gains of the same magnitude. Changing their focus to the attainment of goals rather than investment performance could lead to higher satisfaction with advice and a greater willingness to pay, Moran Howlett Financial Planning’s Paul Moran said.

“Our emphasis needs to be on perceived value. Focusing on past performance and past experiences tends to create experiential thinking and clients are willing to pay less for advice couched in those terms,” Moran said.

Moran, who is a highly qualified financial planner, is studying for a PhD on financial decision-making at Victoria University in Melbourne.

He said many clients made irrational decisions based on past investment returns and experiences.

To help clients make better financial decisions, advisers should develop a method of advice that is forward-looking and systematic.

“Listen for irrationalities in client decisions and understand that your job is to be the voice of reason in an irrational world,” Moran said.

People who were approaching retirement age and had realised they had not saved enough were most at risk of making poor investment decisions, he said.

“People facing certain losses become risk seekers and those who have achieved gains become risk averse,” he said.

Those who have been successful with investments could also be prone to poor decision-making as they are more likely to believe they are in control of forces that are beyond their control, such as share market gains.

“We are held responsible for things that are beyond our control and I think that’s why some people pay for advice; so that they’ve got someone to blame when things go wrong.”

He said advisers also needed to be aware they were susceptible to irrational thinking themselves.

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