Here is a thought experiment. Could the medical field reliably serve millions of Australians without X-rays, MRIs, blood tests, and other scientific and scalable diagnostics? Could we as a society rely on doctor interviews and intuition alone to guide society to physical wellbeing?
It seems unthinkable in modern society to forgo the benefits of serious diagnostics. When I talk to doctor friends, they agree that a major factor in their ability to improve the wellbeing of an individual is attributed to the truly scientific and precise diagnostic tools they use to understand each individual patient with precision.
Doctors now know their patients more than ever before, not because of increased education requirements, but because of improved diagnostic technology.
Medical diagnostics have increased the personalisation potential for surgical and pharmaceutical-based treatments to small and serious health problems, alike.
Where am I headed?
Unless the Good Advice framework seriously ‘levels up’ the methods and diagnostic technology it requires to demonstrate an understanding of each client – specifically the preferences and behaviors that drive financial decision-making – it is hard to see financial wellbeing improving across Australia or advice scaling reliably to more Australians.
In short, good advice requires a ‘good’ understanding of a client – one that is modern, scientific, transparent, and repeatable. The methods that meet these standards are found in the decision sciences and share a robust mathematical underpinning. Today’s methods, namely questionnaire-based tools, fall woefully short of setting a foundation for good advice.
The broken current state of client understanding
Yet much of the industry still relies on old, ‘stated preferences’ approaches to understanding clients – such as traditional risk tolerance questionnaires or dialogue-based discovery by a human adviser.
This is despite 20 years of behavioural economics demonstrating that people are not very good at stating their preferences and that advisers (unwittingly or wittingly) can introduce bias and noise into the measurement picture.
Continuing to rely on these old methods to assess clients would be like doctors forgoing MRI scans and blood tests in favour of the traditional “tell me where it hurts” bedside quiz.
You can’t accurately assess someone’s medical or financial condition by simply asking them how they feel or administering a multiple-choice quiz. Relying on poor and outdated diagnostic methods would surely harm the likelihood of delivering good medical outcomes.
A data-driven future for advice in Australia
A new class of ‘revealed preference’ diagnostics, which combines decision science and gamified client experiences, can precisely and efficiently measure client preferences by the decisions they make, without interference and bias.
This includes determining not just a client’s broader goals and financial situation, but also a wider range of specific factors such as risk and social preferences.
This holistic view includes behavioral predictors, such as the measurement of loss aversion, so advisers understand which clients are more likely to sell when markets get volatile.
Uniquely, such methods can determine the decision-making quality of the client and protect those who are prone to wealth-destroying mistakes. At the same time, this safeguards advisers from recommending products or giving advice to vulnerable clients.
By overhauling client diagnostics as part of meeting the proposed “good advice” duty, the industry stands to reap many benefits, just as medicine did.
Advisers will spend less time profiling clients, yet in return they will gain a more accurate read on client preferences, obtaining insights about clients that simply aren’t possible with traditional stated preference approaches.
Revealed preference diagnostics allow advisers to deliver good advice more often and to far more people from all walks of life. The technology frees up advisers from simple tasks, to spend more of their precious time providing the human touch when human advisers are involved. Or, the technology can also underpin and safeguard a purely digital advice journey, expanding access to affordable advice for all Australians.
The potential introduction of a “good advice” duty is a great step in the right direction when it comes to helping financial advisers cut red tape.
It also provides the perfect opportunity for the industry to embrace modern methods of understanding clients, to more accurately diagnose a client’s preferences and likely behaviors, and always prescribe the right advice.
Bernard Del Rey is co-founder and chief executive of Capital Preferences.
Nice in theory. I’m actually married to a doctor. She will quickly explain to Bernard that psychiatry is simply guess work with drugs. This isn’t working so let’s try this instead, or let’s make a new drug milkshake. Psychiatry to medicine is like economics to finance. Guesswork and theory. There is NO engineering/science to it at all.
Until you can make a client react in exactly the same way AT ALL TIMES to the same set of stimuli this area of financial planning will forever be based on intuition, feelings, instinct and education.
To equate it to a science is naive at best.
Completely agree.
You have taken one part of medical science and applied your findings to the whole of the medical science, both pure and applied. Thankfully these days medical and hospital treatment is not completely based on pseudo science otherwise treatments would not be successful.
The financial advice industry needs to move on from the excuse of ‘past performance is no indicator of future performance’ for the betterment of its future. There are tools and techniques in other professions that can be adapted or mimicked within the financial advisory ranks. In fact, that is happening. AI financial planning is developing example.
Not correct Hedware. I was only talking about psychiatry, not the “whole of medical science”.
The point being that we are talking about human psychology both in the investment arena and medical science/psychiatry. As a result, I posit that if the specialist qualified medical sciences are still exercising guesswork in the treatment of human psychiatric conditions/mental processing to suggest financial professionals can apply the same “science” as to how the same person will react to the same/similar stimuli at all points in their life/mood/side of bed they got out of/what the mate at the pub just scored in the stock market is naive.
The other parts of medicine are extremely scientific with double cross over blind testing with multiple peer reviews. Calling risk profiling a pure science is the same as calling economics a pure science. This is farcical in the extreme.
In reference to your point regarding AI, I agree that at some point AI will likely provide the best “technical advice”, it will be less successful I believe, at least in the next 20 years, in having clients maintain discipline, stay the course during volatility and not making personally destructive financial decisions. Not sure how AI relates to risk profiling but thought I’d address your second point.
Terrible headline. Absolutely terrible.
But good advice
Michelle Levy (if using the medical analogy) is recommending see a drug manufacture – obviously “good advice” will be delivered? Who needs a professional when a product manufacture will help recommend product – all good advice and free I’m lead to believe – seriously?
No it’s not, it’s a utopian ideal that does not deal with the reality of how human psychology works.