If consumers go on shunning advisers, we risk catastrophe

The trouble with nudging where financial services are concerned is that it sometimes relies on certain assumptions about consumers. For example, a dominant narrative from policymakers is that the average saver or investor has limited knowledge and capability when it comes to financial matters and should welcome a helpful prod now and then.

Unfortunately, growing evidence suggests consumers don’t share this conviction. Overconfidence is a major theme in behavioural economics and new research by Nottingham University Business School’s Centre for Risk, Banking and Financial Services (CRBFS) has added to fears that policymaker and consumer perceptions of the average saver or investor’s financial nous might be decidedly at odds.

Our study involved a YouGov survey of more than 2,000 consumers who were quizzed about how they perceived their own financial expertise and the importance of specialist advice. They were asked, for instance, whether they felt they needed help in choosing saving and investment products and meeting their financial goals.

More than half said they didn’t believe they required assistance, with less than a third admitting they did; the remainder neither agreed nor disagreed. There was a similar split regarding willingness to pay for financial advice, with the majority disagreeing or strongly disagreeing with the notion. Most also said they were usually sure their financial decisions were right; that they felt they did a decent job in keeping their affairs in order; and that they could tell when a financial offer was too good to be true, had strings attached or was being sold with the help of ‘marketing gimmicks’.

Such confidence might seem encouraging, but it is very probably perilously misplaced. Related research by CRBFS, carried out with a different set of more than 1,000 respondents, revealed major shortcomings in many people’s financial knowledge, with most incapable of giving correct answers to comparatively simple questions about everyday products such as ISAs, unit trusts, home insurance and annuities.

On average, savers and investors think themselves eminently capable of making financial decisions whose implications might just prove of the most monumental consequence – when in reality they are anything but. Given that the discrepancy between know-about and know-how might make a world of difference when a person’s economic future is on the line, this finding is nothing less than alarming. The financial services sector should be deeply worried when people who profess fiscal acumen are then unable to say for certain whether a cash ISA is subject to income tax.

This is why granting financial consumers greater freedom is one thing and abandoning them to their fate is quite another. If they are to be nudged towards taking more responsibility, then the fact that they know less than they think they know demands urgent attention. For their part, policymakers have to be completely sure of what people need, want, think and know before they cut them loose. The sector also has a huge role to play in averting would-be catastrophe; and the first step is the wholesale restoration of trust.

Consumers have to appreciate how and why they can benefit from dedicated expertise. They have to realise that the implications of financial choices can be genuinely momentous. They have to understand why the marketplace is no environment for those who think they know a reasonable amount but in truth know precious little. In short, the sector has to earn the chance to show them what it can do – and it has to deliver.

Trust is the essential lubricant of any interaction, and without it none of the above is possible. It is not a question of a hard sell or blinding clients with science. It is a question of clarity and honesty.

At a time when many savers and investors are vulnerable, the sector has to treat customers fairly instead of sensing, exploiting and even revelling in their susceptibility. Those who are being nudged in dangerous directions deserve to be guided back to safety rather than herded ever nearer to disaster.

James Devlin is a professor of financial decision-making at Nottingham University Business School and director of its Centre for Risk, Banking and Financial Services