Sometimes the best source of new business is old business.
Investing existing clients’ excess cash should be the simplest means of increasing assets under management. Not only is the relationship already there, but for most clients, it is the most sensible thing to do that they have not got around to yet.
Outside of outright scams, sitting on too much cash for too long is reliably the costliest investment mistake most people are prone to make. And yet countless clients continue to make it.
However, recent developments in tech and how the financial advice industry uses it could change this.
Disclosures always fall on deaf ears
An investor with moderate risk tolerance in a globally diverse multi-asset-class ‘optimal’ portfolio, can expect excess returns over cash of around 4 per cent to 5 per cent a year averaged over the long term.
Using otherwise unnecessary cash as an emotional pillow could easily be somebody's biggest (yet unseen) expense every year.
The financial advice industry tends to treat the problem of sitting on excess cash as one of ignorance, and therefore seeks out the solution in a more convincing chart.
However, those that act in response to having the size of the foregone returns quantified are the least likely to have foregone those returns in the first place.
If someone is doing something you see as silly, telling them it is silly is probably not your best bet, because it almost certainly does not look – or rather, feel – silly to them.
That this is a behavioural problem in need of a behaviourally-conscious solution is increasingly understood.
It is even spelled out in both the FCA’s recent consumer duty legislation, which directs firms to evidence how they account for "how [clients] behave, at every stage and in each interaction", and the EU’s Mifid II guidelines, which note that disclosures must be designed to be "effective" as well as informative.
The question for advice firms, then, is not only, 'if people can’t be trusted to act logically in response to clear financial incentives, what should we be trying instead?', but also, 'if effectiveness requires personalising both the content and timing of interventions, how do we do that at scale?'.
The problem of personalisation
There is an obvious tension between personalising solutions and applying them at scale.
Consider one of the most famous applications of behavioural insights: encouraging hotel guests to reuse towels by changing the message that reminds them that they could.
Should it focus on the energy-saving benefits, the overall number of guests who already chose to reuse their towels, or the guests staying in that exact room who chose to do so?
Unsurprisingly, the studies showed no universal winner. Different people respond differently to different messages.
