Financial planners should warn investors of uncertainty
Financial planners need to communicate future uncertainty in a nuanced and careful manner, according to Milliman.
Planners and advisers should also better stress that the probability of achieving an initial goal for investors might be a binary outcome (succeed or fail) as investors were often not rational and remained prone to numerous behavioural biases.
“The power of sophisticated analysis, combined with more effective communication from advisers taking into account behavioural biases, can help investors achieve their goals like never before,” the report said.
“However, an adviser has to ultimately make a judgement call on how much to educate and shift the natural position of clients and how much to push them.
“This comes down to the personal goals of clients.”
According to Milliman’s study, the probability should not be taken as guarantee when it came to investing and retirement and that they may be no way to make up for a plunge in value of a lifetime of savings.
“For example, a retiree may have a goal of generating annual income of $50,000 over the next decade and have a 95 per cent chance of achieving it by following a particular financial plan,” the study said.
“That is a high level of certainty, but cold comfort if the outcome ends in failure as was predicted to happen five per cent of the time.”
However, the retirees should be aware that such low probability events could occur and that the hypothetical scenarios could predict they would achieve that goal.
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