InvestmentsApr 21 2020

Clients need an emotional connection

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It is estimated that in 2018, 4.5m UK adults (9 per cent of the adult population) had received regulated advice in the previous 12-month period – a significant increase on prior years.

But forecasts that digital wealth propositions would be a prime source of growth in the retail advice market are yet to be realised.

In fact, recent consumer research undertaken by the FCA identified significant consumer resistance to robo-advice platforms, and acknowledged that, “worryingly, these robo-refusers may well be the very people who might need it most.”

So why are potential clients resisting digital wealth offerings? 

To answer this question, it’s important to first understand the underlying drivers of investor behaviour and how individuals make advice-seeking decisions.

A variety of complex emotions can surface when an investor engages with an adviser

In an FT Adviser article titled, “Robo-advice still has a role, albeit limited”, the author noted that: “Relationships lie at the heart of business, because investment decisions are inherently emotional, not rational.” 

This statement is supported by a growing background of research showing financial decisions extend beyond ‘rational’ factors, such as costs and convenience.

The benefits of these human relationships are often promoted by face-to-face advisers and firms with hybrid propositions.

The arguments tend to focus on the ability to interpret clients’ needs and provide a tailored service – something that has traditionally required human interaction.

However, advances in technology and the digital user experience mean this is no longer the case.

User interfaces can now be personalised at account level and AI is facilitating a deeper client understanding to improve communications and recommendations.

So why does face-to-face advice still have the edge for a large majority of consumers?

It comes down to the ability to interpret and address clients’ emotional needs - and an adviser’s ability to do this remains unchallenged.

The discipline of Emotional Finance combines psychoanalytic theory with observations of financial behaviours in individuals and markets to provide us with more insight in this area.

Understanding the role of emotion

A variety of complex emotions can surface when an investor engages with an adviser.

Financial anxiety, the need for control and willingness to trust are just a few examples.

These emotions can help guide an individual’s evaluation of their current financial position, define how they manage their financial affairs and guide whether they seek the support of a professional adviser.

Some brief examples of how these emotions are put into practice are listed below:

The need for control

Research has shown that psychological wellbeing can be improved by the perceived increase in one’s level of control of a situation, even when true control of the outcome may not be possible.

This concept can be directly translated to the inherently uncertain world of financial markets, where individuals are unable to attain ‘true control’ over investment outcomes.

In the traditional advice model, dialogue between investors and advisers can alleviate some of the discomfort caused by this lack of control. The ability to scrutinise advice provides individuals with a level of perceived control through input into the decision-making process – even where the decision itself is not challenged.

In contrast, digital propositions are usually one-way interactions. As such, clients may not feel empowered to have the ability to influence decisions – potentially stemming an unpleasant sense of detachment.

Financial anxiety

Financial anxiety is distinct from general anxiety or depression and concerns one’s engagement with personal finances in an effective way.

Although much of the research surrounding financial anxiety has been directed towards individuals in often vulnerable financial situations, the construct is also witnessed among affluent individuals.

As one wealthy individual stated to me in a research interview, “when it comes to [having difficulty in managing] our own money… I don’t know… it’s completely irrational”.

When a human adviser is unavailable to address this feeling, high financial anxiety can often result in an ‘avoidance’ strategy and the complete dismissal of professional advice. 

Trust

The FCA’s report mentioned above found the strongest correlation between robo-acceptance and a high degree of trust in large corporations.

Investor characteristics such as gender, age, willingness to take investment risk, previous experience of engaging financial advisers, financial satisfaction and financial literacy have all been linked to trust in academic studies.

From an emotional perspective, trust has been closely linked with empathy – often characterised by how well a person’s feelings are interpreted and how compassionate the response to these feelings appears.

For individuals with a naturally trusting disposition, the need to perceive empathy may not influence their choice of financial advice.

But for those where trust generation is pivotal, the constraints on empathy building among digital wealth providers can be a significant hindrance. 

Although the information above is not intended as an exhaustive list of the emotional influences that exist, it sheds some light on the intermediating role that emotion plays in client interactions – be those online or offline.

To succeed in what is still a human world, robo-advisers and firms with digital propositions must acknowledge, understand and address these emotions.

After all, the role of advisers is not only to provide economic benefits to clients, but to put clients at the heart of what they do and to deliver a high level of service.

This can only truly be done by looking beyond the rational motivations that individuals have. 

As we have seen from some in the marketplace, a hybrid combination of human and online interaction may help address the constraints that each model has.

Firms should also consider how else they can tailor the user experience to better connect with clients on an emotional level.

 Philip Courtenay is founder of Applied Emotional Finance