Today’s ASIC submission to the 2014 Financial System Inquiry, released this morning, is filled with much discussion about the financial advice industry. However, it also takes a good look at consumers and the way that we seek out investment advice and information.
It explained that when it comes to investing and making financial decisions, there are five key points that affect our decision.
“Research from psychology indicates that the ‘rational’ investor that underpins traditional economic theory does not exist. Instead, people are simply ‘normal’, and their decisions are motivated and influened by a complex mix of cognitive, social and emotional factors,” it notes.
The five factors they point out as heavily influencing investment choices, for better or worse, are the following:
- Behavioural biases
- Low levels of financial literacy
- Lack of access to good quality financial advice and factual information
- Information and choice overload
- Length and complexity of disclosure
These five points might be opening you up to exploitation, but they can also cloud judgement when trying to look logically at comparing investment opportunities.
The first, behaviour biases, particularly when it comes to decision making biases, are claimed to be put into a number of groups:
- Preferences – Often influenced by emotions e.g. immediate gratification often valued over future gain, choices made to avoid negative emotions, such as stress, or to promote positive emotions, such as security.
- Beliefs – People approach decisions with pre-existing beliefs that are likely to influence those decisions e.g. over-extrapolating a small number of observations, or being over-confident about the likelihood of certain events occurring.
Property Observer likens this to investors who claim that an investment can only be good if it has a view, or is within walking distance to some-amenity-or-other. Sweeping statements can fall into this category.
- Decision-making shortcuts – Decisions often made using heuristics or ‘shortcuts’ – for example, unconscious rules of thumb, which may lead people to choose options that appear familiar or unambiguous without weighing up all the options.
“Specific attributes of financial and credit products – such as their complexity, risk, uncertainty and long-term nature – can accentuate people’s natural inclination to eschew difficult reasoning and fall back on these behavioural biases,” explains the report.
Here, they warn, there is “potential for effective marketing to target and, in some cases, exploit these biases… As a consequence there is a risk that investors and financial consumers will acquire products and services that are not aligned with their financial situation, risk profile, objectives and needs.”
Clearly, it’s worth investors keeping an eye on their own ingrained biases.
Low levels of financial literacy
Financial literacy is the second mentioned point, and covers the “application of knowledge, understanding, skills and value in consumer and financial contexts and the related decisions.”
At present there is no rigorous financial literacy teaching in schools, particularly around property, leaving many to their own devices and others’ advice.
“For individual investors and financial consumers, knowing how to make sound money decisions is a crucial skill in today’s world, regardless of age. It is a ‘core life skill for participating in modern society.’ It affects quality of life, opportunities people can pursure, their sense of security and the overall economic health of society,” the report continues.
Past conversations with Smart Property Adviser’s Kevin Lee has proven that there is a growing support, particularly in the real estate community, for these skills to be taught at school.
Lack of access to good quality financial advice and factual information
The next is access to financial advice. While ASIC is, clearly, discussing financial planners – noting that less than 40% of the Australian adult population has seen a financial planner – there are some interesting observations. Those over 50 or with a higher socioeconomic status are more likely to head to a financial planner, while those with a lower socioeconomic status or who are under 25, are less likely.
Despite this, “Industry studies have shown that investors and financial consumers who access financial advice benefit financially as a result of the advice, even after the cost of the advice is taken into account.”
The reasons for not seeking out advice include the aforementioned lack of financial literacy, a perception of advice being out of reach, a lack of trust in advisors, the scale of advice (with some wanting it bit-by-bit rather than all at once), wide access to general advice, and the overall cost of advice itself.
Information and choice overload
Anyone who has spent 10 minutes on Twitter can attest to the abundance of material online, and it doesn’t just stop with the ever-growing content available on the internet. Books, catalogues, seminars and even television shows boast huge amounts of information to sift through that can sometimes work out counterproductive, and paralytic.
“Regardless of their demographic characteristics or level of experience, many investors were overwhelmed both by the volume of information available, and the difficulty in assessing the validity of the available information,” the report explained.
Not only is there too much information, but it’s not all trustworthy either, and it can be difficult to tell the difference.
Length and complexity of disclosure
Lastly, disclosure is a huge issue. The more paperwork thrown at investors, with disclosure sheets and documentation, the safer that everyone is meant to feel. However, with the length of some contracts being almost outrageous, it’s hardly surprising that the length and complexity if these documents has made the list.
While ASIC has attempted to help consumers in this respect, bringing in summarised home loans’ key fact sheets in the past among other initiatives, it appears that there’s still much confusion around this complex information.
Which of these is causing you to spin your wheels the most? What would you like to see the industry fix up?
This article first appeared on Property Observer.