Elston CPD Redefining Adviser Value - Page 8

most decisions since System 1 is quick, led by intuition and cognitively less burdensome. When faced with conflicting information that cannot be easily resolved, System 2 participates to process the information carefully and logically, leading to a more informed decision. Since System 2 is effortful, slow and time consuming, it is infeasible to use System 2 for every decision we make and we reserve our mental resources for the more consequential decisions. Table 1 compares the characteristics of System 1 and System 2 and how these systems manifest in the making of investment decisions. Table 1: System 1 and System 2 compared Characteristics Examples in investment decision-making System 1 System 2 Fast, automatic, frequent, emotional, stereotypical, subconscious. Slow, effortful, infrequent, logical, calculating, conscious. Cognitive short-cuts, simple heuristics, naïve diversification, simple division. Create a financial plan, an optimal asset allocation strategy and a rebalancing and review process. When providing advice, advisers are in-effect engaging with these two systems of reasoning that underpin various aspects of investment decision making. We propose that when offering cognitive assistance, the two systems leverage different types of adviser skills and functions. System 1 which is driven by emotions and gut feelings leverages advisers' interpersonal skills and emotional intelligence. Advisory functions that predominantly engage with client emotions and hence correspond to System 1 include helping clients understand their goals, dreams and reason for investing, short term and long term liquidity needs, reducing client anxiety when markets are turbulent and helping clients avoid impulsive decisions about stocks. System 2, which is led by logical reasoning and calculations, leverages the technical expertise and knowledge of advisers. The related advisory functions are ‘economic’ in nature such as helping investors design portfolios that suit their goals and ongoing rebalancing of the portfolios to ensure they stay on track and that transactions are tax efficient. Research shows that while knowledge and expertise is the key reason investors seek advisers, interpersonal skills are most valued aspects of investment advice. In a survey of 512 clients,1 80% of the respondents voted knowledge and expertise as the main reason for using an adviser, while other reasons such as access to information and lack of time were voted as a reason by under 15% of the sample population. However, when asked the skill they most valued in an adviser, 82% of the respondents voted for interpersonal ski