How Behavioural Science can help your conversations about charging

Professor Paul Dolan and Steve Martin

In partnership with

New Thinking

This material was first published in 2012.

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With new models required for charging clients for your professional time and advice, the forthcoming RDR changes are undoubtedly going to have a massive effect on your business.

At Aviva, we know that many advisers are concerned about how best to communicate these changes to both new and existing clients with the greatest possible effect. Get it right and the positive effect will be felt by your business for years to come. So it was clear that some new thinking was required.

We’ve also been aware of the growing impact Behavioural Science can have on rephrasing and recontextualising difficult subjects. And I personally have seen examples where it has had great commercial effect. After all, we all seek to influence how our clients behave and Behavioural Science can provide that ‘nudge’.

We knew it was time to look to this science to help advisers show that financial advice provides value to customers, ensuring that the up-and-coming changes don’t put off customers from taking steps to plan for their future.

So we were delighted when one of the UK’s leading behavioural scientists, Professor Paul Dolan of the London School of Economics, and best-selling business author Steve Martin, agreed to work with us to help advisers understand how Behavioural Science can help demonstrate the value of advice in the new world of charging.

The result, New Thinking, is full of practical, useful insights, tips and suggestions to help you have better outcomes, more often, when communicating your charging structure to your clients. Use it, and it can only help your business.

Aviva Life & Pensions UK Limited. Registered in England No 3253947. Aviva, Wellington Row, York, YO90 1WR. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Firm Reference Number 185896. aviva.co.uk

ForewordAndrew Beswick, Business Solutions Director, Aviva October 2012

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Dr Paul Dolan is Professor of Behavioural Science in the Department of Social Policy at the LSE. Among his previous academic appointments, he was a visiting research scholar at Princeton with Daniel Kahneman (Nobel Laureate in Economics). Paul has 100 peer-reviewed papers in top journals and has won many research grants from various research councils and funding bodies. There are two main themes to his work. The first focuses on developing measures of wellbeing that can be used in policy, particularly in the valuation of non-market goods. The second considers ways in which the lessons from the behavioural sciences can be used to understand and change individual behaviour. This work is focusing on the important role that situational factors play in influencing our behaviour, as summarised in the ‘MINDSPACE’ report for the Cabinet Office. This report provided the intellectual momentum for the Behavioural Insights Team in the Cabinet Office, to which Paul was recently seconded at the invitation of the Head of the UK Civil Service (the Cabinet Secretary).

Steve Martin is an author, business columnist and speaker who, together with Dr Robert Cialdini and Dr Noah Goldstein, co-authored the New York Times, Wall Street Journal and Business Week International bestseller, ‘Yes! 50 Secrets from the Science of Persuasion’. In 2008 the book was nominated for the Royal Society annual prize for science writing, and in 2009 the Harvard Business Review listed ‘Yes!’ on its prestigious ‘Breakthrough Ideas for Business’ listing. Steve regularly features in business and the national press including his monthly ‘Persuasion’ column for British Airways’ in-flight magazine and the Harvard Business Review. His columns are read by over 1.8 million readers every month. Steve speaks on the science of influence and persuasion and its application to a wide range of business, government and non-profit organisations around the world.

The authorsDr Paul Dolan (left) and Steve Martin

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We all seek to influence how people behave. Financial advisers are no exception, seeking to influence the financial behaviours of their clients. Recent industry developments mean that an adviser’s ability to effectively and responsibly influence clients in a sustainable way has arguably never been more important. For example, the Retail Distribution Review (RDR) will require financial advisers to move from a commission-led business model to a fee-paying one, and to demonstrate to both current and new clients the merits of doing so.

There is nothing new in the idea of influencing people – but there is certainly something new in what we know about how best to do it.

Recent research in the behavioural sciences shows that approaches based on education and information do not actually work that well. Instead, we are each influenced, in remarkably similar ways, by the framing of a decision and by subtle contextual factors. These effects are fast, automatic and largely unconscious. Behaviour is not so much thought about: it simply comes about.

We’ve gathered up the robust effects of this behaviour under the mnemonic MINDSPACE. By drawing on additional insights gleaned during a number of focused interviews with financial advisers, this book offers practical suggestions about how you can use MINDSPACE to more effectively influence behaviour, thus allowing you to effectively talk about fees and build long-term mutually beneficial relationships with both new and existing clients.

Executive summary

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1.0 Introduction 6

2.0 A context for behavioural insights 8

3.0 Three steps to behaviour change 10 3.1 Structural interventions 11 3.2 Cognitive interventions 12 3.3 Contextual interventions 12

4.0 MINDSPACE – effects and lessons 13 4.1 Messenger 15 4.2 Incentives 17 4.3 Norms 20 4.4 Defaults 23 4.5 Salience 24 4.6 Priming 25 4.7 Affect 26 4.8 Commitments 27 4.9 Ego 28

5.0 MINDSPACE – putting it into practice 29

6.0 Applying MINDSPACE to adviser scenarios 31

7.0 Concluding remarks 35

8.0 References 36

Table of contents

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The world that financial advisers and their clients face is changing dramatically. One of the more immediate and significant changes, prompted by the Retail Distribution Review (RDR), is that financial advisers will move from a business model that has traditionally charged a commission on their services, to a model where they will have to charge up-front fees.

Demonstrating worthSuch a change has profound implications for both financial advisers and their clients. From a customer’s perspective, fees generated by a financial adviser have arguably been ‘invisible’ given that they are paid by the product provider, even though the customer will have been informed that their financial adviser’s remuneration is generated by a commission model. From the financial adviser’s perspective, one key challenge will be to successfully demonstrate to customers that the advice they provide is worthy of a stand-alone fee, and to do so in a way that maintains their current client base.

1.0

Introduction

one key challenge will be to successfully demonstrate to customers that the advice they provide is worthy of a stand-alone fee

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A people-to-people businessThis report recognises the importance of providing financial advice in accordance with required regulations and industry codes of practice. It also recognises that financial advice is primarily a ‘people-to-people’ business and therefore subject to the same influences as any other human interaction. As a result, a financial adviser who has knowledge of these influences as well as the skill to ethically and responsibly influence them, should be at a competitive advantage when it comes to introducing up-front fees, growing their current business and generating new business opportunities.

What drives behaviour The last couple of decades have witnessed great advances in our understanding of human behaviour and decision-making. Many of these ‘behavioural insights’ are somewhat counter-intuitive: they often fly in the face of what we’ve traditionally believed influences an individual’s decision. The purpose of this report is to review the most important of these evidence-informed behavioural insights. We use MINDSPACE as a nine-letter mnemonic to do this. These effects are what really drive behaviour, rather than the things that people actually think affect them, which are often quite different.

Making ‘Yes’ more likelyThis report is about when and where these behavioural insights can best be employed by financial advisers, to help them communicate the value of financial advice to both existing and future clients. It can also help advisers appropriately position their transition from commission to fees, and to create a long-term sustainable business model that assists them in defending and growing their client base. When it comes to changing behaviours, no-one can claim that there are guarantees – single strategies that influence and persuade people to say ‘Yes’ every time. Yet nor should the absence of such guarantees mean we’re left to rely on intuitions and hunches. By using the insights of properly conducted experiments, a financial adviser can gain a significant advantage that makes it more likely that a client will say ‘Yes’.

Practical, actionable and ethicalIn writing this report, we’ve conducted an extensive review of the published evidence on which to base our recommendations. Additionally, we’ve carried out a series of structured, in-depth interviews with financial advisers. The purpose of these interviews was to gain a better understanding of the challenges they believe RDR will present, and give insights into which of their current clients they feel would present the biggest challenges to their business when it came to talking about fees.

As a result, this report seeks to provide information that not only has a foundation in Behavioural Science, but also has a practical application. Furthermore, the practical guidance it provides to financial advisers is highly actionable, allowing it to be tailored and meaningful to the typical business situations that emerged from the interviews.

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We live in a world that’s characterised by information overload and stimulation saturation. Even if we wanted to (and many times we don’t), we can’t possibly take in everything. With many people and stimuli fighting for our attention, we often use shortcuts and rules of thumb to make decisions. Moreover, many of our decisions will be influenced more by the context of the decision, than the cognition of our minds. As a result, many of our decisions and behaviours tend to come about, rather than being thought about.

Going with the grainWith financial decision-making, it’s unlikely that a well-thought-out proposal detailing all the relevant information delivered by a friendly financial adviser will suffice. It’s also unlikely that information will be processed in a way the financial adviser might assume. In addition to being persuasive, compelling and in the interests of the customer, a financial adviser’s proposals must also go with the grain of how people will most likely make decisions.

we often use shortcuts and rules of thumb to make decisions

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A context for behavioural insights

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MINDSPACEThis paper reviews a comprehensive framework of approaches that will enable financial advisers to design strategies, interventions and proposals to use with their clients, that are more likely to be both successful and sustainable. The primary model of behaviour we employ has been developed and tested by members of the MINDSPACE Partnership Team (Dolan et al, 2012). In testing these approaches we acknowledge that human behaviour is a ‘complex system’; therefore, we’ve drawn on evidence from experiments that tested the conditions that need to be in place in order to maximise the chance for a behaviour or decision to occur, and be sustained.

Real-world utilityAdditionally, we draw on information gleaned from a series of interviews conducted with financial advisers in order to ensure that our recommendations, suggestions and advice have practical, real-world utility. We’ve incorporated these real-world applications into each of the behavioural effects we review, and also in a series of ‘typical scenarios’ that financial advisers have reported they will likely face.

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A crucial first step any financial adviser must take in attempting to influence a customer’s decision or change their behaviour, is to conduct a target behaviour analysis. Put simply, they must identify the decision(s) and behaviour(s) that they are seeking to influence and change. This analysis typically involves identifying the specific outcomes that would be desirable for both the financial adviser and the customer. In business parlance, this is often referred to as a well-defined business objective.

Step 1. Identifying what needs to changeFor example, a customer’s financial target might be to retire at a certain age. The financial adviser might identify that increasing the regular amount that the customer saves, and changing the product the customer enrols in, will be the most appropriate behaviour changes to help achieve their goal. Accordingly, the financial adviser’s objectives will be to persuade the customer to cease their current savings plan, increase how much they save each month by a specific amount, enrol in a new savings plan and retain the adviser’s services for a fixed fee.

While it is important to recognise that every customer will have some level of individual needs and requirements that are unique to them, it’s also likely that a number of the target behaviours a financial adviser may seek to influence and change will be similar across population groups. Some behaviour may be more important for young people – for example, motivating young people to start a pension plan – whereas others are more likely to become important in older age (which annuity should I purchase?).

Step 2. Deciding on the orderThe second step involves developing potential interventions into a hierarchy or order of importance. In the context of giving financial advice, the order will likely align closely to the typical steps in a customer interaction. For example, in the early stages of interactions it will

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Three steps to behaviour change

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be important for the financial adviser to demonstrate trust, expertise and similarity in the eyes of their customer. As the interaction progresses, it will become more important for the financial adviser to employ other behavioural insights – eg by providing testimonies of what many others who are similar to the customer are doing.

Step 3. Choosing the mix The third step for the financial adviser is to consider the intervention mix that will be used. We categorise these interventions in three ways.

3.1

Structural interventionsThese are interventions that align to the infrastructure or technology that is, or could be, made available to clients. They’re less likely to be concerned with individual behaviour; they’re more about the physical and technical opportunities that exist. For example, a customer who doesn’t have access to the internet will be more difficult to persuade to register for an account that offers preferential returns only to those who manage their account online, than someone who is internet-savvy.

Finding adviceResearchers have investigated the financial advice available online relative to that given by trainee financial advisers – and found mixed results (Ciccotello & Wood, 2001; Mantel, 2000). The web gave more-consistent advice on life insurance and tax-benefit issues, but less-consistent advice on estate tax and investments. They also found that relative to web-based advice, live advice was less sensitive to complexity in a client’s situation. Therefore, clients are willing to pay for financial advice depending on how much they believe the advice is tailored to them, and on whether the financial adviser they’re working with encourages their trust.

clients are willing to pay for financial advice depending on how much they believe the advice is tailored to them

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Working the webPeople who use the web tend to be younger, better educated and more affluent. Consumers also want web-based advice to be branded, interactive, independent, unbiased and tailored (Joo et al, 2007; Sillence & Briggs, 2007). So, a financial adviser’s value proposition can include tailored advice given over the web. In this respect, it’s important to consider who would have access to different channels of advice, and which demographics would be more willing to act on advice from those sources.

3.2

Cognitive interventionsThese interventions relate to economic or psychological mechanisms involved in rational thinking that typically makes evaluations and plans. Cognitive interventions usually include the provision of information and the offer of economic incentives. Other behaviour change strategies that can be effective in influencing reflective processes include ‘self-monitoring’, ‘prompting intention formation’, ‘promoting specific goal setting’, and ‘prompting a review of goals’ (Michie et al, 2009). There are also variations in how different people respond to incentives. For example, offering incentives for opening a savings account had substantial positive impacts on investment for women, but no effect for men.

3.3

Contextual interventionsThese interventions are summarised by the MINDSPACE framework that we will outline, in detail, shortly. Simply put, they describe interventions that can prompt desired behaviours by triggering automatic psychological processes in a customer, which in turn lead to a desirable change in behaviour or activation of a decision. In the financial adviser’s journey to influencing client behaviour, MINDSPACE techniques can be best used at behavioural change steps 2 and 3 that we discussed earlier.

The power of contextDolan et al (2012) reviewed the academic literature, and also financial retail products, to highlight behaviour change interventions in the financial domain. These draw on elements of MINDSPACE, as well as on more traditional education and information interventions, all of which are designed to change behaviour through changing minds. Their paper, which summarises much of the latest evidence, shows that changing contexts can have a powerful effect on financial behaviour as a result of the automatic psychological mechanisms that drive choice. Within the MINDSPACE framework, we also focus on the contextual influences of automatic motivations.

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The last decade or so of research in Behavioural Science has shown quite clearly that behaviours and decisions are largely driven by contexts, and not by cognitions – in other words, they come about rather than being thought about. These behavioural effects are fast, automatic and largely unconscious. And yet their power in shaping behaviour, swaying opinion and influencing decisions is strong.

A combination works bestMINDSPACE is a mnemonic that describes nine of the most robust effects that can be employed to influence change. They’re summarised in the table, on the following page. The important thing to note, even at this stage, is that the effects of using MINDSPACE work best in combination, eg when the right ‘Messenger’ taps into the appropriate ‘Ego’. But a good messenger on its own might not be enough if ego effects mitigate any benefits, so it’s always a good idea to think about how best to join up effects.

The traditional approach: a mixed successTraditional approaches to influencing behaviours and purchase decisions have relied on attempting to ‘change minds’ primarily through the provision of information, the offer of incentives and employing strategies of

4.0

MINDSPACE – effects and lessons

behaviours and decisions... come about rather than being thought about

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Effect Definition

Messenger We are heavily influenced by who communicates information to us

Incentives Our responses to incentives are shaped by predictable mental shortcuts such as strongly avoiding losses, hyperbolic discounting and mental accounting

Norms We are strongly influenced by what others do

Defaults We ‘go with the flow’ of pre-set options

Salience Our attention is drawn to what is novel and seems relevant to us

Priming Our acts are often influenced by subconscious cues

Affect Our emotional associations can powerfully shape our actions

Commitments We seek to be consistent with our public promises, and reciprocate acts

Ego We act in ways that make us feel better about ourselves

positioning and negotiation. In other words cognitive interventions, as described above. Such approaches have had mixed success. The impact of financial information, education and literacy on behaviour is far from clear (Dolan et al, 2012). Importantly, education and information programmes work best on those who start off better educated and informed, and so they serve to widen the gap between advantaged and disadvantaged.

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4.1

MessengerOne way people decide on what action to take or which decision to make, is to pay attention to the person or entity who’s delivering the message – sometimes without listening to the message itself.

Not what, but whoResearch into factors influencing the effectiveness or uptake of financial advice can be divided into three areas: the adviser, the advice and the client. This model is inspired by communication theory, which makes the conceptual distinction between ‘sender’, ‘channel’ and ‘receiver/destination’ (Dainton et al, 2011; Shannon, 1948). The message forms only a small part of the overall communication. In the context of financial services, the financial adviser is the messenger and, therefore, the automatic ‘messenger effect’ becomes crucial.

Behavioural Science has identified a number of key characteristics that correlate strongly with an effective messenger.

An overview of our financial adviser research Independent research for the New Thinking book was carried out by Professor Paul Dolan and Steve Martin in August 2012 among financial advisers planning to adopt both restricted and whole-of-market models. Research was conducted as in-depth interviews.

Advisers were asked a number of questions, including:

l How they planned to introduce the subject of fees to clients

l Their plans for a charging structure

l What steps they had taken to prepare themselves for the impact of charging

l Their top three challenges regarding post-RDR client charging

l How they currently attracted new business

The research highlighted how advisers currently work with clients as educators, and how and where they interact with them, all with a view to identifying the areas where using Behavioural Science techniques could create improved client interactions.

This research was analysed and cross-referenced with the MINDSPACE Behavioural Science framework to shape opportunities for influencing clients. The results helped define some of the practical advice in New Thinking.

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1. ExpertisePeople learn from experience to pay more attention to advisers who’ve given them good advice in the past (Harvey & Fischer, 1997; Lim & O’Connor, 1995). Advisers tend to have less influence on more experienced and knowledgeable clients. This means that it’s especially important to draw an experienced client’s attention to evidence that reinforces the financial adviser’s expertise before making any recommendation.

People who know little about financial matters should be more influenced by, and willing to pay for, financial advice. But there are ways to influence experienced clients, too. A firm of estate agents, for example, was able to increase the number of property contracts by 15% by first arranging for a colleague to introduce its expertise to potential new clients before they made any request or recommendation (Goldstein & Martin, 2008).

2. Trustworthiness (Siegrist et al, 2005) One approach that can be taken to increase trustworthiness, is to admit a small weakness or drawback to their proposition before they deliver a stronger positive message (Cialdini, 2009). This can be especially beneficial if the weakness admitted is already well recognised, or one that a competitor is likely to raise in the future.

3. SimilarityResearch has shown that people tend to place greater trust in advisers they judge to have values more similar to their own, shared goals and similar intentions. This effect is nearly universal across populations (Duflo & Saez, 2003). Being of the same sex and age as the advice-taker also increases the attention paid to an adviser.

4. Personality (Harvey et al, 2000; Harries et al, 2004; van Swol & Sniezek, 2005; Yaniv, 2004) Clients are more influenced by confident advisers, irrespective of the quality of their advice. Advice from dissenting advisers is usually discounted unless they are historically better than consensus opinion. People are also better at taking advice when financial advisers are more distinct from one another. This points to the importance of the financial adviser demonstrating their unique features and attributes prior to providing advice.

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Tips for the adviser1. Clients place greater trust in advisers they judge to have values like their own.

It’s therefore of importance to draw clients’ attention to similarities between both parties in all spoken and written communications.

2. Within advisers’ firms, it will be effective to match clients to advisers who are most ‘like them’.

3. Demonstrate confidence in opinions held. Clients are proven to be more influenced by confident advisers.

4. To support trustworthiness, it’s important to admit a small weakness to a recommendation (eg product A is not the lowest-cost option… but it contains additional benefits which offer excellent value from a long-term point of view).

When asked what made their financial advisory service different from their competitors, 8 out of 10 advisers said it was a combination of a friendly service and a personal touch. Advisers should therefore consider what actions they are going to take to stand out from their rivals.

4.2

IncentivesAs any economist will be happy to tell you, people respond to incentives. But as a behavioural economist will also tell you, people respond to incentives in ways that are influenced by psychological processes. Here, we highlight their three main effects:

1. Loss aversion People are generally more motivated to take an action to avoid a loss than to take the same action that will result in a gain.

Dolan et al (2012) summarise research that shows, again because of loss aversion, that the framing of incentives as ‘losses’ can be used to motivate people to take financial advice. The lesson here is clear: where opportunities arise to deliver messages about how a customer can make savings or financial gains, the astute adviser frames those gains and savings as psychologically more-motivating losses.

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people engage in mental accounting – that’s allocating money to discrete bundles; basically, putting ‘money in pots’

Spending decisions can be influenced by loss aversion, too. People are less likely to spend tax cuts delivered as a lump sum or framed as a ‘rebate’, rather than the same money delivered as many small payments or framed as a ‘bonus’. Significantly, more donations were made in a company charity donation scheme when the amount to be immediately deducted from an employee’s salary was framed as ‘per day’ (eg £1 per day for a year) compared to ‘per year’ (eg £350 for the year), provided that the daily framed amount was typical of daily expenses (eg a cup of coffee) (Gourville, 1998).

2. Hyperbolic discounting We prefer to live for today at the expense of tomorrow. We usually prefer smaller, more immediate payoffs to larger, more distant ones. £10 today may be preferred to £12 tomorrow. This is consistent with standard economic theory. But when we, as many of us will, prefer £12 in eight days to £10 in a week’s time, we are exhibiting dynamic inconsistency.

This set of preferences implies that we have a very high discount rate for ‘now’ compared to ‘later’, but a lower discount rate for ‘later’ compared to ‘later still’. This is referred to as hyperbolic discounting.

Ausubel (1999) provides tentative evidence of this impatience with offers from a credit card company where ‘pre-introductory’ and ‘post-introductory’ interest rates were randomised across the sample. Ausubel found that consumers are at least three times as responsive to changes in the introductory interest rate, as compared to dollar-equivalent changes in the post-introductory interest rate. Financial advisers could therefore consider charging different profiles of fees over time, and during the year.

3. Mental accountingIt is also well established that people engage in mental accounting – that’s allocating money to discrete bundles; basically, putting ‘money in pots’. This can help to influence choice, and ease the dread of paying fees (Epley et al, 2006).

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An example of this was when university students were given a surprise $50 payment for taking part in an experiment. Half were told that it was a ‘bonus’, and half a ‘rebate’ on the year’s tuition fees. In the bonus condition, participants spent over $30; in the rebate condition, they spent under $10, saving the rest. Consequently, it should be easier for financial advisers to get people to save their annual bonus, rather than save an equivalent proportion of their income. Likewise, paying an extra £100 off a £100,000 mortgage seems like a pointless drop in the ocean, but adding £100 to current savings of £500 seems significant.

Using this behavioural insight, splitting funds – and fees – between different accounts, is a technique that can be utilised by financial advisers to good effect.

In our research, financial advisers were asked about strategies for protecting their business against competitors, and attracting new clients. Most did not have a pro-active strategy – but some offer ‘first meetings’ on a no-fee basis to attract new clients.

The role of costGiven that advisers have to charge fees, it is worth specifically considering the role that cost plays in decision-making. To a rational economic agent, an increase in cost represents a welfare loss. And so, all else being equal, demand would fall. In aggregate, most markets would seem to be rational in the sense that demand-curves slope downwards from left to right – if price goes up, demand goes down.

How price is perceivedAggregate market data hides a lot of individual variation. However, some people, some of the time, buy more when a price rises. They do this when price is seen as a signal for quality. There’s now evidence from brain imaging studies that shows that when subjects are told they are drinking expensive wine, the pleasure centres of the brain light up more – the level of self-reported pleasantness rises too – even though the wine is exactly the same as that given to those who are told it is less expensive (Plassman et al, 2008).

when subjects are told they are drinking expensive wine, the pleasure centres of the brain light up more... even though the wine is exactly the same as that given to those who are told it is less expensive

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Price vs valueIt also seems that we expect cheaper goods to be more cheaply made, and thus not to work as well. In a wonderful study of painkillers, electrical shocks were applied to the wrists of participants before and after they took a placebo they believed was a pain pill. 85% of those who believed they were taking the expensive pill reported a reduction in pain from the shocks, compared to 61% for those in the low-priced sample group (Waber et al, 2008). Moreover, there’s some evidence that products which are purchased are valued more highly, and are more likely to be used, than those that are received for free.

So, for some clients some of the time, financial advisers might like to market themselves in the same way as Stella Artois: as being ‘reassuringly expensive’. It may also be better to frame ‘free’ advice differently by first signalling the market price of such advice, and contrasting this to the discounted rate being offered to the client.

Tips for the adviser1. When communicating charging, advisers might like to market themselves as

‘reassuringly expensive’, as we often associate cheaper goods to be more cheaply made and thus, not to work as well.

2. Given that clients often live for today at the expense of tomorrow, financial advisers should consider spreading fees over time, rather than as lump sums.

3. People are generally more motivated to take an action to avoid a loss than to take the same action that will result in a gain. It can therefore be as valuable to communicate the potential loss to the client of not adopting an investment approach as the potential for gain.

4.3

NormsWhen deciding the best way to act in a particular situation, people will often take their cues by watching the behaviours of others around them. Norms have been used extensively in many sales and marketing environments: think ‘8 out of 10 cats prefer Whiskas’.

Behavioural scientists who study norms have identified a number of conditions where they should be particularly effective in influencing behaviours and decisions.

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1. Multiple othersThe more people behaving in a particular way, the more likely it is that other people will follow. In an experiment conducted by research scientist Stanley Milgram, an assistant stopped on a busy New York City sidewalk and gazed skyward for 60 seconds. Most passersby simply walked around the man without even glimpsing to see what he was looking at. But when four other men joined the original sky-gazer to form a group, the number of passersby who also joined them more than quadrupled.

The lesson for financial advisers is clear: collect examples of clients who are already paying fees, and share them with their clients who have yet to start, as evidence of what others, just like themselves, are doing.

2. Target audienceWhen researchers placed signs in hotel bathrooms saying that the majority of previous guests had re-used their towels during their stay, towel re-use rose by 26%. When the sign was changed to state that the majority of guests who had stayed in that particular room re-used their towels, compliance rose by 33%. The reason for this increase was that the norm (the majority of guests) was targeted or related to the recipient of the message (people like you who stayed in this room).

To increase the effect of normative information, the financial adviser should avoid presenting the testimonials that they are most proud of, and instead present those that are most similar to their audience. For example, if the client is a parent with a young family, the financial adviser could provide information about what many other young families with children are doing with their finances.

people will often take their cues by watching the behaviours of others around them

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3. ReinforcementIn energy conservation, 80,000 homes were sent letters that provided social comparisons between a household’s energy use and that of its neighbours (as well as simple energy consumption information). The scheme reduced energy consumption by 2% relative to the baseline. Interestingly, the effects of the intervention decayed over time between letters, and increased again upon receipt of the next letter. In other words, if the norm is not immediately apparent to people, repeated efforts may be required for its effects to become self-sustaining.

The insight is that it’s important that the financial adviser makes an effort in their future communications with clients, to reinforce that their client is not only behaving in ways that are desirable, but continues to be similar to others just like them. Highlighting this fact in follow-up letters and emails, as well as at each future financial review meeting, is highly recommended.

4. Desirable behaviours When tax evasion rates are published, tax evasion rises. When health centres point out the number of patients who fail to attend appointments, no-shows continue to rise. Drawing attention to unwanted behaviours can serve to increase those unwanted behaviours.

By letting slip the fact that the uptake of fee-paying clients has been slow, the financial adviser may be normalising that unwanted behaviour. If paying fees has yet to be established as the norm, then the advice for financial advisers is to instead alert clients to the increasing number of other clients who have started to pay fees.

Tips for the adviser1. The more people behave in a particular way, the more likely it is that other people

will follow. It’s therefore advisable to frame recommendations in terms of ‘norms’. While paying fees is not yet the norm, advisers can shape conversations by informing their clients of the increasing number of other clients paying fees.

2. Supplying clients with examples of existing clients who are already benefiting from a charging structure will support the creation of a norm.

3. If the desired norm is not immediately apparent to people, repeated efforts may be required. It is therefore recommended that the desired behaviour is reinforced subtly over time in follow-up letters and emails, as well as at each future financial review meeting.

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4.4

DefaultsMany of the choices that we make in our information-laden lives are essentially choices that have already been made for us, and we tend to go with the flow of whatever is the ‘default option’.

For example, enrolments in tax-efficient savings plans can be as much as 50% higher when the default for employees is automatic enrolment, as opposed to an active opt-in. The willingness to carry an organ donation card is four times higher in countries where consent to donate is assumed. The default option is also extensively used by marketers to persuade clients to receive email offers and marketing messages.

Defaults can be very effective in influencing decisions and behaviour, because they work with people’s tendency to procrastinate.

Defaults are generally best employed in situations where there is a single best course of action. As a result, one potential application for financial advisers is, when communicating with clients about the transition from commission to fees, to make the client’s acceptance of fees the default setting on introductory letters and emails. Recent research suggests that setting a default and accompanying it with a message of what the customer stands to lose if they don’t consider the default, can actually have an enhancing effect (Keller et al, 2011).

we tend to go with the flow of whatever is the ‘default option’

Tip for the adviserOffering clients a default situation regarding a decision can be very effective, because it works with people’s tendency to delay decision-making. This could, for example, be used as a way of ensuring a conversation: “If I don’t hear from you by x date, I’ll call you to arrange a meeting.”

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4.5

SalienceIn a world where people are bombarded with stimuli, there’s a tendency to unconsciously filter out a lot of the information. As a result, behaviour can often be influenced not by a compelling or well-thought-through proposal, but instead by stimuli that are simply: novel (messages in flashing lights), accessible (items on sale next to checkouts) or just simple (a rhyming slogan).

FramingAs an example of where attention is directed, Hossain & Morgan (2006) provide evidence from an online auction that people respond too much to the sales price, and too little to the postage-and-packing price. Brown et al (2008) hypothesise that when consumers think in terms of consumption, annuities are viewed as valuable insurance, whereas when consumers think in terms of investment risk and return, the annuity becomes a risky asset because the payoff depends on an uncertain date of death. To test this, they randomised frames to a group of over-50s, and found that the vast majority of individuals prefer an annuity over alternative products when the question is framed in terms of ‘consumption’, while the majority of individuals prefer non-annuitised products when the questions are presented in terms of ‘risk and return’.

AnchoringInitial ‘anchors’ also hold a special relevance on which to base a decision. A minimum payment amount on credit card statements is a pertinent example of such an anchor. One study found that when a credit card statement had a 2% minimum payment on it, people repaid £99 of a £435 bill on average; however, when there was no minimum payment, the average repayment was £175. In this case, presenting a minimum payment dragged repayments down.

The lesson for the financial adviser is to pay careful attention to what they present to clients first, as this will likely set the anchor that influences – in relative attractiveness (or unattractiveness) – what comes next. In the same way that a wine bar can influence an increase in the sales of more expensive wines by placing even more expensive wines at the top (rather than the bottom) of their wine lists, a financial adviser should be careful to position the payment of fees in their proper perspective by choosing what they compare those fees to.

Another way in which the issue of fee structures could be minimised, would be to split them into several components, possibly even paid at different times, so at least the immediate costs are smaller.

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Tips for the adviser1. The order advisers place options in, is likely to influence response. If you are

communicating fees, position the highest figures first so that other examples appear more attractive by context. Equally, contextualise your arguments in the same way.

2. Try to avoid offering too many choices. Research reveals too many choices frustrate people. Limit choices to three or four that meet your client’s needs.

4.6

Priming A person’s subsequent behaviour may be altered if they are first exposed to certain sights, words or sensations. This effect is known as ‘priming’ and typically occurs outside conscious awareness, meaning that it is a distinctly different construct from simply remembering things. Like a number of these effects, priming has the potential to lead to controversy, not least because of the rather sinister idea that advertisers and sales people might be able to manipulate others into buying things that we didn’t really want to buy.

A number of studies in the financial services industry have demonstrated the influence of priming effects. For example, websites that ‘prime’ visitors with credit card insignia, typically lead to people spending more on goods, and in a quicker time.

One potential implication of this finding for financial advisers is to signal, up-front, their ability to accept various payment methods to encourage clients to pay for their advice. Another, is to consider the venue where meeting to discuss fees actually takes place, with a more business-like office environment potentially being more conducive to a discussion about fees. Even if, as is likely, meetings take place in a client’s home, consideration should be given in advance to which room in the house the meeting should take place – a home office for example.

Tips for the adviser1. Prime prospects by including professional qualifications, trade body memberships,

awards and insignia that communicate professional expertise and value on websites and communications.

2. The location meetings take place in will influence outcomes. It is important that the client either visits the adviser in their professional environment – or that if the meeting needs to take place at the client’s home, it is in an appropriate room such as their home office.

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4.7

Affect Affect (emotion and feeling) can be a powerful influence in decision-making. A person’s emotional responses to words, images and events can be rapid and automatic, so fast in fact that people can experience a behavioural reaction before they realise what they are reacting to.

Moods, rather than deliberate decisions, can influence judgements, meaning they end up contrary to logic or self-interest. Studies have shown that people in good moods make unrealistically optimistic judgements, while those in bad moods make unrealistically pessimistic judgements. Studies in business negotiations have shown that people in a sad mood were more likely to accept lower prices for goods and services they sold, than those in a neutral or good mood condition.

We used a framed-field experiment to test the impact of affective messages in a financial health-check on subsequent financial behaviour (Dolan & Metcalfe, 2012). We found that negative attitude increases the likelihood of opening a savings account, compared to positive attitude. We also found that people completing an online financial health-check are more likely to report getting information about their finances, and to have taken out personal insurance. These results are informative in relation to the design of aids to increase financial capability. Significantly, the strongest predicator of a person choosing to take the health-check was their individual discount rate (those valuing the present more highly are less likely to complete the health-check). More risk-seeking individuals are less likely to complete the financial health-check.

It could be argued that all perceptions contain some emotion – we do not just see a savings plan, we see a necessary savings plan, a value-for-money savings plan or a rainy-day savings plan. This means that people might enrol in a savings plan not because of interest rate, accessibility or return, but because of the visceral feeling of knowing that they have one. This ‘what it means for me’ rather than ‘what it does for me’ may provide alternative ways of framing proposals for financial advisers.

Tips for the adviser1. Emotion plays an important part in decision-making. If the adviser knows their client

well, they should frame their recommendations in line with what it could do for their lifestyle or needs rather than a factual framing of benefits.

2. It is proven that communicating ‘worry’ appropriately (eg the financial demands of old age) is likely to have an active effect on a client’s decision-making.

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4.8

CommitmentsBehavioural Science research suggests that people feel a strong inter-personal pressure to be consistent with their previous commitments and actions. Making a commitment ties a person’s sense of self to a particular course of action. Studies have shown that asking for a small initial commitment (such as asking someone if they would be willing to call in advance if they have to cancel a restaurant reservation, or verbally repeat back details of a medical appointment), significantly reduces subsequent no-shows (Cialdini, 2009; Martin et al, 2012).

Commitments can be strengthened to the extent that they are voluntary, effortful and public.

It’s advisable that a financial adviser seeks small voluntary commitments from the client in the early stages of engagement and builds on these initial commitments. This voluntary, effortful and public commitment checklist can also serve as a useful prompt to evaluate the success of a client meeting.

In addition to living up to their commitments, people are inclined to live up to their obligation to reciprocate previous acts. For example, waiters gain bigger tips if they provide a small gift to diners before placing the bill on the table. Business owners are more likely to respond to financial surveys if the survey request is accompanied with a gift voucher, rather than a promise of a much greater reward following its return.

Accordingly, it is the astute financial adviser who asks themselves not who can help me? But instead whom can I help? Looking for ways to provide personalised information, unexpected advice, service and assistance to clients and potential clients first, activates a reciprocal exchange building mutual obligation and future relationships.

Tips for the adviser1. The adviser should look for relevant ways to offer assistance, help and added

value beyond expectations. This will initiate a desire for reciprocity in the business relationship.

2. Personalising the content of written communications will have a direct effect on commitment. Handwrite the recipient’s name and add handwritten content within a letter.

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4.9

EgoPeople prefer to behave in ways that support an external image that is positive and allows them to feel good about themselves. One of the classic illustrations of this effect is how sports fans will ‘bask in the reflected glory’ of their team’s performance after a win – “We were brilliant; we won the cup!” – but dissociate themselves when their team’s performance was less than triumphant –”They played rubbish; they lost us the cup!”

Money managers, provided by banks to help clients who are approaching serious financial difficulty, can play a role in helping clients to feel better about themselves. For example, one study over a six-month period, reduced overdrafts by almost 50%, and the average savings balance increased from nothing to more than 15% of the average overdraft at the outset. A good example of employing ego-effects is a financial adviser who is proficient at complimenting the good choices a customer makes based on their advice.

Because of our ego, and partly from a desire to be consistent, future actions are influenced by past behaviour.

Psychologists went door to door trying to persuade people to accept a large, ugly placard promoting road safety on their front lawn (Freedman & Fraser, 1966). If they asked people to display a small sticker in their car, willingness to have the large sign later was significantly increased. People who initially had fairly weak opinions about road safety, thought, “Well if I agreed to the small sticker, I must feel strongly about it.” By carrying out the first pro-road-safety action, participants felt they were inconsistent to refuse the second, more burdensome request.

Decision-making is shaped by past behaviour. If people complete an action, their attitudes change. They will start thinking, “Well, I’m taking financial advice, so I must care about my finances.” Getting people to do a small act to address their finances will raise their chances of completing more arduous financial tasks later.

Tips for the adviser1. Focus recommendations on a client’s values as much as on their situation.

This will align recommendations to what is truly important to their beliefs.

2. It is worth getting clients to complete small financial tasks, relevant to their needs, then compliment them on the value and importance of this task. This will, in turn, influence them towards the completion of larger financial tasks later.

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5.0

MINDSPACE – putting it into practice

Effect Definition

Messenger Demonstrate your industry knowledge, credentials and experience before making any recommendations. Or arrange for someone else to do this.

Ensure credentials are made salient on business cards, letters of introduction and website pages. Include a two-line biography on the back of business cards.

Be willing to admit a small weakness first and point out similarities that exist between you and the client early on in interactions.

Incentives Pay attention to how recommendations are framed to clients. For example: ‘it’s £350 per year which is the equivalent of less than £1 per day’.

Where possible, frame decisions in terms of potential losses rather than gains.

Align to people’s tendency to have high discount rates, today, by allowing clients to spread the cost of fees over a period of time.

Determine the various ‘money pots’ that clients use to divide up their income and expenditure, and focus on those with the most discretionary expenditure or ‘wriggle room’.

The following section takes the nine key Behavioural Science MINDSPACE effects and details practical steps advisers should take in their day-to-day activity to achieve better outcomes in their conversations about charging.

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Effect Definition

Incentives Importantly, you need to ensure that your fees are seen as being good value for money. It is not always a question of being the cheapest. Good service comes at a price, and your clients recognise that “You get what you pay for.”

Norms Point out how others most like your client are already behaving.

Ensure mechanisms exist to reinforce behaviours over time (eg at annual review meetings).

Where norms don’t exist, use increasing numbers to drive the adoption of new, more desirable norms.

Defaults People will inherently go with a pre-set option, so be proactive in making advice available to clients. This will help clients reconsider just ‘going with the flow’ and make them consider getting tailored financial advice to meet their needs.

Salience Initial anchors have special relevance.

Consider the order in which options are presented (high fee first, to low fee).

Breaking the fees up into components makes the information clients are presented with easier to digest.

Priming Environments prime and influence subsequent behaviours.

Consider the locations of meetings (a home office rather than kitchen/living room).

Consider insignia used on websites and images on letters and communications.

Affect Emotions shape actions.

Use case studies and stories to ‘orientate’ clients to a future feeling they may encounter (eg negative as well as positive emotions).

Commitments Seek small commitments in the early stages of client development.

Make client commitments public where possible and appropriate.

Look for ways in which you can create obligations, by providing help in personalised and significant ways.

Ego Recognise good decisions clients have made.

Show how the small steps a client makes towards financial independence are both desirable and make them feel happy about doing the right thing for themselves and their family.

Focus recommendations on a client’s values.

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During the interviews conducted as part of the research for this report, financial advisers were asked to describe some of the common challenges they believed they would face when it came to persuading clients to move to a fee-paying business model. Although each of the advisers reported on specific individual cases, there was a remarkable similarity between them all. In summary, advisers reported that in contrast to a number of high-net-worth clients who already paid fees, it was clients rated as middle or lower-income who would provide the greatest challenge when it came to talking about fees.

In addition, the majority of advisers also predicted a greater challenge emanating from their current portfolio of clients – primarily because the fees they had earned to date have been ‘invisible’ to the client. In such a business model it’s easy to see the potential for a client to perceive financial advice as a low-value service. What can’t be seen can’t be noticed. What isn’t noticed is unlikely to be attended to. And it’s hard to put a value on items we don’t attend to.

In this section we take a closer look at three of these typical scenarios described by advisers:

a) Charging fees to an existing client

b) Charging fees to a new client

c) Persuading middle and lower-income clients to pay fees

We also suggest practical ways in which the MINDSPACE approach can be applied to overcome these challenges.

6.0

Applying MINDSPACE to adviser scenarios

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a) Charging fees to an existing clientConsider a client that you’ve advised for a number of years. Over time, perhaps you’ve helped them set up a pension scheme, or assisted on a decision about a saving plan or investment. Until this point you’ve been remunerated on commissions paid by the product supplier. As a result, there’s never been an exchange of fees between you and your client.

When considering which of the MINDSPACE effects should be central to your approach, our suggestion is that the ‘Commitments’ effect should be at the core of your strategy.

Given that people prefer to remain consistent with behaviours and decisions they have previously made, your conversation should begin by reminding the client of previous (and one assumes successful) occasions when your client has taken advice from you. It will also be important to point out examples of other similar clients who have moved to a fee-paying arrangement. The ‘Incentives’ effect could also prove useful, and can be effectively applied by pointing out the importance of advice tailored to individual needs, and the benefits that could be lost by failing to do so.

b) Charging fees to a new clientEven though the challenge faced in persuading a new client to pay a fee for your advice is largely the same as that for an existing one – “How do I persuade a client to pay a fee?” – the context will certainly be different. A new client will have no previous history or experience of working with you to draw on to guide their behaviour. Additionally, they may have only limited, or even no, history of receiving financial advice in the past.

By contrast, they may have considerable experience gleaned from working with another adviser. They may be contacting you because they’ve become dissatisfied with the level of service they’re getting from their current adviser, or perhaps the change to fee-paying has prompted them to look for alternatives.

people prefer to remain consistent with behaviours and decisions they have previously made

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Regardless of the reasons, even though the primary goal of persuading this new client to work with you on a fee-paying basis remains constant, the MINDSPACE effects used to do so successfully will be different from persuading a current client. The advice here is to lead with the ‘Messenger’ and ‘Norms’ effects.

As with any new contact, the ability to present both your expertise and your trustworthiness is crucial, as will demonstrating the similarities that you share. One way to do this would be to ensure that your experience and qualifications are provided to the client in advance of your meeting, either by way of a letter, email of introduction, or by arranging for a member of your team to communicate this when making the initial appointment. This leaves the opening moments of your face-to-face meeting as an opportunity to chat about any similarities you share, interests you have in common and characteristics you admire.

Doing this employs both the expertise and similarity components of the ‘Messenger’ effect. The third, trustworthiness, can be accomplished by alerting the potential new client to a small drawback or weakness (essentially demonstrating they have nothing to hide) immediately before making your most important appeal. For example, drawing the client’s attention to the fact that other advisers may be cheaper, but your years of experience allow you to tailor and personalise your advice so that they receive the best possible advice at a competitive price.

In support of your claims, it would then be important to use the ‘Norms’ effect by highlighting many others whose circumstances match your new client’s. Remember when using norms, not to refer to the clients that you are most proud of, but instead refer to the clients who are most similar to the one you are currently engaged with. Age, family status, interests, and even where people live, can be effective ways to point out similarities.

the ability to present both your expertise and your trustworthiness is crucial

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c) Persuading middle and lower-income clients to pay feesIn our interviews with advisers, a significant number reported their belief that it would be middle and lower-income clients that would present the biggest challenge when it came to talking about fees.

Given the universal application of these MINDSPACE effects, we remain convinced that the three effects already utilised in the previous two scenarios (‘Messenger’, ‘Norms’ and ‘Commitments’) would be of equal value when engaging with middle and lower-income clients. But we’d also recommend the use of several other effects: ‘Priming’, ‘Affect’ and ‘Incentives’.

We’ll take each in turn.

Priming‘Priming’ describes the unconscious cues in the environment that can trigger certain behaviours such as sights, sounds and other stimuli in the environment. As a result, we suggest that an adviser should give due consideration to where the meeting takes place, ensuring that the environment serves as an effective prime for the substance of the meeting.

AffectBy understanding and painting a picture of the concerns that a client has about their finances, the adviser is able to tap into ‘Affect’. The recommendation here is not to induce unnecessary concern. Not only is such a strategy irresponsible, it’s also counterproductive – the evidence shows that inducing too much worry in a person can lead to a paralysis of decision-making. The introduction of a little concern, however, can be motivating, provided that the adviser accompanies the ‘Affect’ with a practical and specific action that a client can take to avoid that fear.

The Incentive (in context)Another potential challenge to middle and lower-income clients, is the fact that fees can appear relatively high when not viewed in the proper context. For example it seems sensible that someone would drive from one side of town to another to save £50 on a £100 pair of shoes; however it seems less sensible to make that same trip to save £50 on the purchase of a car that costs £10,000. Notice that the £50 saving never changes, just the context or ‘mental account’ to which that £50 is assigned.

As a result, the recommendation is that an adviser highlights the total value or cost of the financial product being discussed – which in the case of a mortgage, an investment or a pension could be many thousands of pounds – first, before presenting their fees. Doing so not only presents a favourable comparison, it also increases the chances that the individual concerned will allocate the fees to their appropriate ‘mental account’.

One other consideration from ‘Incentives’ concerns the number of choices that an adviser offers to clients. While received wisdom would suggest that more choice is better, the evidence clearly shows that too much choice is disengaging. Our advice would be to limit options and choices presented to a maximum of three or four.

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7.0

Concluding remarks

We hope that this report has generated some useful and useable insights. We won’t summarise them all here, but rather add three important points to note.

First, to reiterate, most of the influences on behaviour operate below conscious awareness and therefore cannot be tapped into by the conscious questioning of market research. With the best will in the world, we’re not especially good at knowing what just influenced us, or what will influence us in the future. We doubt that anyone would say that a good way to get them to open a savings account is to make them feel a bit worried about their finances (Dolan & Metcalfe, 2012). But we know it’s a good way because we watched what people did, not what they said they would do.

The only way to understand human behaviour, is to observe the human animal in its natural environment, ideally without it knowing that it is being watched. We need to be more like David Attenborough, and less like Michael Parkinson.

Second, the most effective deployment of each of the elements of MINDSPACE is immediately before, not during or after, the delivery of a message or a request to the customer. We know this may sound obvious, but it’s worth being clear that MINDSPACE matters before the event and not simply as a checklist after it.

Third, MINDSPACE should be seen as a way of augmenting good advice and not as a way of replacing it. It is still incumbent on the financial adviser to offer advice that is in the client’s interests and consistent with their financial goals and plans. MINDSPACE is the ‘Intel inside’ that makes the delivery and processing of good advice more likely.

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8.0

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TR01138 11/2016

First published in October 2012

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