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De-biasing DB transfer deliberations: Combining objective analysis and “soft skills”

Behavioural Bias
The first two articles in this series explored the key cognitive biases your DB transfer clients may experience, along with how you might tackle these to help them avoid irrational decisions. In the final instalment in this series, we explore the broader and crucial value-add which Advisers provide DB clients, through a combination of professional analysis and a personal touch.

As all good Financial Advisers know, there really is no substitute for professional analysis, guidance and personalised recommendations. The importance of such advice on DB transfer decisions is illustrated in the two preceding articles in this series. The cognitive biases we explored are a subset of those which impact our financial decision-making. Most of these biases operate in favour of the “take your cash now” option. Unfortunately, many biases are magnified when we’re under time pressure, dealing with unfamiliar material and when there’s a lot of uncertainty (all factors at play for the typical client weighing up their DB transfer options).

challenge (of) the realism of a client’s objectives

The FCA recognises the critical role of Advisers in countering the irrationality which these cognitive biases elicit. In the June 2017 consultation paper “Advising on Pension Transfers”, the FCA explicitly advocate “challenge (of) the realism of a client’s objectives, where appropriate including any objectives which do not immediately appear to be rational or factually correct”. It’s also proposed that Advisers might simplify the decision for clients.

This could be done by calculating whether the Cash Equivalent Transfer Value (CETV) offered, will enable purchase of a future annuity with the same benefits guaranteed under their DB pension. This approach will go some way towards shifting clients’ tendency to anchor on the immediately available option as well as realising the objective financial sacrifice it may entail. However, there are three other critical services which advisers should provide to protect their clients (and their professional reputations) from irrational choices which put their financial futures at risk.

1. Achieve a personal grasp of each client’s individual circumstances

The family circumstances, health situations, working patterns, retirement aspirations, legacy wishes, appetite for risk, and other parameters are critical inputs to the DB transfer decision. These topics require sensitivity and skill to educe in time-constrained sessions.

2. Use objective analysis to take a client’s wider financial situation into account

Retirement is increasingly rarely a simple “when to” decision involving a single pension. Clients are likely to have more than one pension. Furthermore, other assets and liabilities will bear on their DB transfer decision. This introduces layers of complexity that can rarely be optimally resolved in the absence of professional analysis.

3. Use soft influencing skills to communicate the risks and benefits appropriately

Cognitive biases may incline clients towards irrational choices and no government advice website or “robo” solution can adequately challenge this. By identifying the potential for irrationality, and structuring discussions to counter the cognitive sources of bias responsible, competent and sensitive advisers are in a position to really support their clients.

There’s no silver bullet

For some clients, the immediately available option will be alluring despite your efforts to communicate the (occasionally significant) downsides. The previous two articles explored several cognitive biases and how you can tackle them when engaging DB clients. However, these techniques will not work for everyone all of the time. People differ in their sensitivity to nudges designed to reduce cognitive biases. So it’s always worth considering the worst case “cognitive bias” scenarios. For example, this could be someone overwhelmed by the emotional draw of accessing more money than they ever imagined and they cannot stomach putting this sum at any significant risk. Or, this could be someone who wishes to take the CETV (against your recommendation) and then invest it and fail to generate the returns they’ll need for retirement.

Such cases, hopefully rare, are probably best politely declined. Both in the interest of professional integrity and in the hard-won reputation for helping people make the most of their financial futures.

By Dr. Laura Haynes

Revisit parts 1 and 2 of this series



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