The Model Office Blog

Unconscious bias and suitability conundrum

[fa icon="calendar"] Jun 1, 2018 9:47:02 AM / by Chris Davies

When Starbucks closes 8000 stores across the USA, you know there’s a problem. It was reported that due to staff’s unconscious racial bias two men were asked to leave and then arrested for ‘loitering’ in a Starbucks café when all they wanted was to buy a cup.

Due to the rise of Behavioural Economics, we have all been alerted to the fact that we have an ‘imposter’ living in our heads that can create havoc with our decision-making and behaviour. Known as heuristics or mental shortcuts, we tend to make decisions and behave in a way that creates comfort and retains the status quo, rather than taking the harder approach of thinking through actions and consequences and using a more counter-intuitive strategy to decision making. 

A few years back there was a piece of research published in Fortune magazine that pointed to a problem in financial advice that financial planners are yes-men and women. The report found most planners reinforced bad investment behaviours instead of fixing them. 

The researchers hired actors as clients for planners and armed them with four fake portfolios graded from high risk to low risk. The result of the financial planning advice given was the same across all four, investors who wanted the next best thing were placed in funds designed to try and beat the market, the risk adverse placed in ultra-cautious index funds.

The worst result came from those holding company shares, only 40% were told to diversify their investment strategy. So what is clear is people do not make decisions or give advice with logic all the time. They tend to mirror client’s bias and offer a non-challenging solution. 

Another piece of research also re-confirmed this with two-thirds of people who employed financial planners were likely to action advice, which to their own expectations!

So the issue really is in the UK where suitability and gaining client informed consent is king, financial planners need to offer challenge to the status quo, they need to offer empathy (not sympathy) and place themselves in their clients shoes and act as a ‘critical friend’ and blend in 'enabler tech' such as risk profiling, client portals  and cash flow modelling to ensure clients are moved to realise that if they keep on going as they are they are only going to achieve similar results, running the potential of not reaching their goals and objectives. In other words, suitable advice does not mean offering clients re-confirmation of what they want to hear. 

As Einstein famously said, we cannot resolve our problems with the same thinking used to create them. It is those financial planners who work hard on their soft skills, emotional intelligence and also keep a close eye on their business conduct and systems and controls that can offer real benefits to their client's on-going needs. 

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Topics: Financial regulation, Financial business development, fintech, regtech, Constructive compliance, Risk management, practice management, FCA, advice, HMT, suitability, FAWG, FAMR, Fitbit, MiFIDII, Data, GDPR, Chatbot, Culture, Enforcement, supervision, audit, Conduct, auto advice, streamlined advice

Chris Davies

Written by Chris Davies

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