Five Words That Shape Client Behavior

April 28, 2015

by Dan Richards

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Financial advisors know the difficulty of getting clients to do the right things. Clients often fail to diversify portfolios, rebalance out-of-whack allocations or discuss inheritance plans with adult children. These behaviors undermine long-term outcomes.

Fortunately, new research in the field of behavioral economics sheds light on conversations that can help clients avoid the minefields that cost them money and strengthen relationships in the process. These conversations tap into the power of default behavior, the things that happen if the client does nothing to alter pre-existing decisions. Popularized in the book Nudge: Improving Decisions about Health, Wealth and Happiness by Richard Thaler and Cass Sunstein, defaults can get clients on the right track and keep them there.

Five words can put the right default behavior in place: “Unless you tell me differently.”

Research on the power of defaults

It is important to differentiate between a “nudge” and a “shove.” A nudge is a suggestion, while a shove is mandated activity that provides no option to change. An example of a “shove” is withholding of taxes. To ensure that tax payers are not faced with large tax bills, the IRS mandates that taxes are paid over the course of the year, without any alternative.

While they’ve become popularized lately, defaults are not new; early examples are negative-option programs such as Book of the Month Club, founded in 1926, where books were mailed to members each month unless they returned a card indicating that they no longer wanted to receive the offering

Additional research on how defaults encourage desirable behavior:

  1. In his TED Talk, Duke economist Dan Ariely describes his research on organ donation rates among European countries. There are extremes between what on the face would be similar countries – Denmark at 4% vs. Belgium at 98%. Germany at 12% vs. Austria at a remarkable 100%.

The difference is opt-in as opposed to opt-out. In high-organ-donation rate countries people are signed up to donate organs unless they opt out. In low-organ-donation-rate countries people are not signed up unless they opt in.

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