What impact is the pandemic having on behavioural finance?

As coronavirus has created dramatic challenges for individuals, economies, financial markets, financial institutions and governments, the research will cover; over-reaction and under-reaction in markets, herding and spillovers effects and the behaviour and attitudes of individual investors.

So how might financial decision-making change in a post-pandemic world?

People are more aware of their mortality, but in the protection market this has not necessarily translated into more enquiries for advisers.

People's engagement and propensity to get advice is better but with additional questions, we have to explain the impact Ian Sawyer, Assured Futures

People are worried about their jobs and paying bills so talking about spending more money has not been high on their list, according to advisers.

And even where there has been interest, Ian Sawyer, commercial director at Assured Futures, says it has become harder for customers to get “on risk” especially if they have had any previous symptoms of Covid-19, as insurers are postponing their decision on the application for cover or declining it.

Mr Sawyer is concerned that any long delays to approving a potential customer at a time when they are their most engaged could decrease their level of engagement at a later date.

Also, some 65 per cent of all income protection demand is due to unemployment cover, but this ceased to exist for new business when lockdown was instilled back in mid-March, because of the impact of coronavirus on the economy and job security.

Mr Sawyer says: “The advice call is also becoming longer. [People's] engagement and propensity to get advice is better but with additional questions, we have to explain the impact.”

Generating business

At a time when advisers are experiencing a fall in enquiries translating into policies, client retention is a key area that protection advisers should focus on, Alan Lakey, director at Highclere Financial Services, says.

In his other job running CI Expert, one of the most common questions he is asked about, understandably, is about generating business.

Mr Lakey says: “One area is making sure you review your clients' protection plan. 

“It is a strange world we live in, because [advisers] review their clients’ investment and pensions, but often people don’t think about reviewing clients' protection plans, which is crazy; as circumstances change.

“I have been showing various advisers how they can undertake a review within three minutes. Not only do they make contact with the client which is always good, because clients like to be kept in touch with, but also in many instances, they will be able to improve the client's cover and naturally that brings with it income.”

Mr Lakey says it will be even more important for advisers to stay in touch with clients and review their situation, as the country faces challenging economic times.

The impact of the virus on financial decision-making is evident across all sectors.

In investments, there are those clients who would have experienced deep market downturns before, so will not be that shaken.

The challenge for advisers is more likely to occur with individuals who panic and rush to sell because they may be relatively new to investing or are risk averse.

Dennis Hall, chief executive of Yellowtail Financial Planning, says: “I’ve not noticed the pandemic having a marked effect on decision-making, but stock market performance has caused some people to make decisions they would not otherwise make. 

“Those who were on the verge of investing have become more cautious, whereas those who were already invested have been slightly more adventurous. Existing investors have been more keen to top up their equity portfolios compared to people who were not yet invested.”

Vulnerable clients

Rebecca Aldridge, managing director of Balance Wealth UK, says: “Most concerns I’ve had are around being out of the market when moving from one investment to another. Advisers have needed to be more conscious than ever about emotional decision-making for their clients and themselves.

"When feeling anxious we make different decisions, more emotionally driven. In other words, using the regulator’s language, our clients are vulnerable, and to be honest I think we can be, as advisers as well.”

Many clients will have lost loved ones during the crisis and by definition this is likely to make them vulnerable. Also in periods of market instability clients are naturally more concerned about their finances.

Vince Smith-Hughes, director of specialist business support at Prudential UK, says both of these situations really bring the value of financial advice to the fore.

He adds: “Advisers can give valuable reassurance, helping clients to get through short-term issues and think about the longer-term. They have wisely counselled many clients against taking action based upon an immediate reaction to the falls in markets.

“Unfortunately the Covid-19 effect on markets and personal finances is making people more susceptible to financial scams than ever before. 

“These can be very sophisticated and difficult to spot. Advisers and providers have an important role to play in making their clients and customers aware of the classic signs to look out for as well as providing information about known scams.”

Mark Pittacio, behavioural economist and business consultant, says: “As markets recover, it will be another example to show clients that the role of an adviser to help resist the temptation to sell when everything was being framed so negatively, proved to be the right thing to do. 

“It once again illustrates the role of advisers being distinctive from fund managers.”

And due to the impact of the crisis on people’s confidence, advisers are going to need to call on their soft skills more than ever.

A recent survey by discretionary investment manager PortfolioMetrix into what advisers regard as the most valuable elements of their service, found that soft skills scored the highest and was ranked in the top three.

Empathy was the standout winner with 76 per cent of respondents including it in their top five.

Understanding a client's life goals secured second place with a 49 per cent hit rate, while simplify and peace of mind shared third place with 47 per cent of the votes.

Ben Peele, managing director of PortfolioMetrix UK, says: "The FCA is increasing its focus on transparency and how advisers protect consumer's best interests. 

“While there's currently no formal requirement for advisers to evidence the value they add, the direction of travel looks to be that way. 

“Evaluating and quantifying value will not only provide the sort of evidence the regulator may want to see, it will help the adviser understand if there are any gaps that may need to be filled.”

Rebecca Aldridge, managing director of Balance Wealth Planning, says: “Soft skills and understanding clients emotion-driven behaviour around financial decision making is going to be more important than ever, plus the ability to gently challenge.”

The biggest thing advisers will have to learn and a lot of them do already have, is patience Toni Sheen, PI Financial

Toni Sheen, a director at PI Financial, adds: “A lot of our advisers can learn how to give advice via textbook; they can pass an exam. It is a different ball game when you are sitting in front of a client and you have a real life situation. You have to have people skills and you have to be able to relate to your client.

“The biggest thing advisers will have to learn and a lot of them do already have, is patience.

"They are going to have to sit there in some situations until they are blue in the face, trying to explain something to someone who does not understand and taking the time to go through it with the client.”

And while in this period there have been some innovative solutions to provide clients with information during this period, many vulnerable clients might not be comfortable with using technology, or might not have access to online video meeting facilities.

Gary Smith, a chartered financial planner at Tilney, says one potential solution would be to introduce clients’ children into the review process (with the clients’ permission), who are more likely to be using technology solutions and, where clients’ might be hard of hearing, assist in relaying messages where telephone calls are being used.

Chris Budd, founder of Ovation Finance, adds: "In this period there are some advisers who have had a pause for reflection and discovered there's a lot more to their role than talking about investments and taxes."