From good intentions to good habits: The behavioural challenge of targeted support

Tim Hogg, director and behavioural economist at consumer group Fairer Finance, explores why customer attitudes may be the biggest barrier to offering targeted support.

I’ll start with a confession: I only started investing after I’d led a big piece of research into why more people don’t invest.

I realised that I was researching people just like me. People who had never considered investing, as the very thought of losing money was sufficiently off-putting.

Our research held up a mirror – showing me my own biases and preconceptions. To be fair, I still stand by my biases (a degree of loss aversion is not unreasonable).

But some of my preconceptions were incorrect. I hadn’t been aware of how – over the long term – investing has outperformed cash savings.

According to Hargreaves Lansdown, investing in shares has historically outperformed holding cash in 91% of 10-year periods over more than 100 years.[1]

So, I started to dip my toes in the waters of investing through a Stocks and Shares ISA.

The investing journey

I mention this, as it is the same journey that providers are soon hoping to take consumers through with the FCA’s new targeted support regime, introduced to address the ‘advice gap’.

Targeted support is a bit like public transport. It takes a group of people from one destination to another, on mass. Assuming that you all want to end up somewhere in or near Liverpool, this train to Liverpool Lime Street will get you closer to your end destination. Assuming that you have plenty of cash savings and don’t need it for a good few years, investing will probably deliver higher returns.

By comparison, ‘full-fat’ advice remains the Uber equivalent. You want to get to Anfield, and this cab will take you right there on the route that best suits your own needs. Advice is personalised, tailored to your context and aims.

The challenge of targeted support is to deliver a journey that is pleasant enough, such that consumers don’t get off the train early, and head back to where they started.

This is the risk with targeted support. We take people on a journey, but they won’t necessarily stay on it – invested for the long-term. As investments fluctuate, people have second thoughts and withdraw their money.

Investing regrets

One of my friends invested a small lump sum a few years ago. It went down in value after several months, so he withdrew it and put it all back in a savings account.

This was not a good outcome for him – he would have been better off not investing at all, or sticking with the investments over the long haul. As it was, he realised a loss, doesn’t feel great about it, and will probably never invest again.

His reaction is normal – after all, good investing behaviour often feels counterintuitive.

But if we want people to get better returns on their money, then they might need to stay invested when the market experiences downturns. It’s impossible to time the market perfectly. As the adage goes, it’s all about time in the market.

So, how can providers use targeted support to encourage first-time investors to stay invested for the long-term?

Avoiding the ‘whiplash’ moment

Experiencing the emotional impact of volatility is the price of higher returns. But my friend simply wasn’t expecting this.

If we want to keep people invested for the long term, then they need to go in eyes open. Expecting volatility. Expecting negative shocks. Expecting to have to moderate their negative emotions.

For this to be the case, targeted support can’t simply be a pushy sales funnel to investments.

This is where behavioural science comes in. We can use behavioural science to help people create new habits – lasting behaviour change. This is more than an initial nudge – it is about shaping the ongoing decision-making environment to be conducive to long-term investing.

Targeted support journeys must genuinely inform customers about the risks of investing, and prime customers to act in their own best interests once invested.

If customers understand the risk of volatility – and are emotionally prepared for it – then they are more likely to stay invested.

Targeted support must genuinely inform customer decisions, going above and beyond to explain what investing will feel like.

Affordable simplicity

It’s tempting to think that we should reduce volatility for consumers by putting them in special funds which manage the ups and downs. Products such as ‘with-profits’ funds, which are designed to reduce the amount of volatility experienced by investors.

The problem is that these funds are expensive and complex.

Recommending unnecessarily costly funds would undermine trust and kneecap targeted support in the long run.

I also challenge anyone to successfully explain the dynamics of with-profits funds to first time investors. If funds are presented as some sort of magic, then consumers won’t understand the nature of the risk versus reward trade-off that they are partaking in.

Complexity and cost are not conducive to building consumer trust. A better approach would be to keep the products simple and the costs low.

If a consumer cannot afford to see all their money fluctuate in value, then it’s better to keep more of their money back in cash savings. Then their investments can go in a cheaper, easier to understand globally diversified fund.

Long term behaviour change

Targeted support will only deliver better outcomes for customers if they are prepared to invest for the long haul.

Targeted support will only be a commercial success if consumers stay invested.

Rather than focussing on short term behaviour change, providers should focus on how their targeted support will create new habits.

One day, I hope to rerun the research into why more people aren’t investing.

Will we see that preconceptions have changed?

Will we see that more people are braced for the whiplash moments, and have invested their money in low-cost products which they understand?

[1] £430bn of excess savings in the UK – time to consider investing in the stock market? | HL