Elston CPD Redefining Adviser Value - Page 7

The performance of human investment decisions Figure 1: Investor Portfolios vs. Indices Source: Dalbar & Lipper (2010) Graphics: AllianceBernstein Figure 2: Performance of Premium 5-star Managers Morey (2005) The change in advisory model and reduction in human advisers risks creating an “advice gap”.6 While individuals may welcome more engagement with their financial decisions, they have a distaste for the cognitive burden and emotional strain it brings with it. While the new electronic systems and product offerings may eliminate many of the detailed decision problems such as those pertaining to optimal portfolio construction and management, to lay investors many of the higher level decisions such as ‘Which risk profile?’ or ‘What time horizon?’ are not immediately straightforward. Moreover, despite consolidation of individual securities in funds, the number of options offered on various investment platforms is still overwhelming and obscure, which makes it difficult for a potential investor to make an informed decision. Overcoming these difficulties, we argue, requires human interaction. In particular a human adviser can offer three things that investors value and are willing to pay for—1) personalised advice; 2) better informed decisions that improve investor confidence; and 3) ongoing consultation to help clients cope with their changing personal circumstances and market conditions. In the next sections, we will outline a framework that describes how advice interacts with the psychology of decision making and identify the areas in which advisers will continue to add value and areas where technology is become increasingly prevalent. The gateway to better client-engagement Understanding the interaction of advisory functions with clientdecision making can shed light on how to emphasise client services appropriately. In his recent book, Thinking Fast and Slow,7 Nobel Laureate Daniel Kahneman outlines that our mind employs two systems of cognitive reasoning that underpin decision making: an automatic subconscious process (System 1) and a controlled, conscious process (System 2). For example, a hasty decision to short a stock that is losing value is a reaction led by System 1; whereas taking a decision after performing a thorough analysis on why a stock is losing value is a decision led by System 2. Usually, we engage System 1 first when making 7