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Expert tips to help disrupt decision paralysis
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How to spend time and money in retirement, gaining $100 and more time to enjoy life. These all seem like positives, and can be, except when they factor into retirement planning. Hal Hershfield and Craig Fox, behavioral decision-making experts from the UCLA Anderson School of Management, have discovered several uncertainties and related biases that keep some people from making important financial decisions affecting their future.
In four insightful videos, watch professor Hershfield explain more about the findings, including takeaways financial professionals can use to help ease client anxiety and commit to financial decisions affecting their future.
Choice is good … or is it?
Having more choices is often considered a positive, and it can be. But think about all the choices for breakfast cereal, for example. Have you ever gone to the grocery store to buy cereal, which seems straightforward enough, only to stand in the aisle overwhelmed by the number of choices? Suddenly toast seems like a better idea. Feeling overwhelmed, you move on to the bread aisle, because there were too many cereal options to decide. Making financial decisions can be a lot like that.
Takeaway: Keep it simple. You have a well-stocked shelf of products to help your clients reach their short- and long-term financial goals. The trick is remembering not to present too many choices at once.
- Start with one decision and gradually work through other smaller ones to help keep clients from feeling overwhelmed.
- Avoid industry jargon and keep language easy to understand when presenting financial options, like annuities, for example.
Tip: When interviewing top performing financial professionals, professor Hershfield discovered they wait to bring up terms and complex concepts like annuities. Discussing client goals during the discovery phase helps keep conversations simple and focused on what a client is trying to achieve. Eventually, the financial professional presents product options that can help prevent overwhelming a client with too many complex decisions.
The psychology of now and later
This psychological principle deals with how people feel about sacrificing now for a future return. In other words, would you rather have $5 today or $10 in six months? In studies, most people choose to have $5 now rather waiting a short time and doubling their money. Why? Immediate gratification — humans tend to feel as if what’s happening in the present is more important what will happen down the road.
Relative to planning for retirement, Hershfield suggests that people prioritize immediate gratification and ignore real financial needs they’ll have in the future. Because people generally have trouble picturing their future selves, they may end up using more of their money for present needs and save less for retirement.
Tip: Find ways to help clients empathize with their future selves. If they can picture themselves later in life or connect emotionally to their future goals, such as living closer to family to be involved with grandchildren, it may help them see real spending needs that will come up in retirement.
Predicting the future
When thinking about financial solutions that could help retirees live the lifestyle they want, things can become tricky. Availability bias occurs when recent events are projected into the future. For example, a client considering whether to buy an annuity or invest in the markets may be influenced by recalling recent market performance. If it’s been up or down, the client may assume the same or similar performance moving forward. You can see how this bias may impact financial decisions.
Tip: When discussing annuities with clients, shift the conversation away from investment outcomes to monthly income.
Future financial security
With conversations involving annuities, one of the top questions clients must face is, “How long will I live?” which can create anxiety and fears that many people would rather ignore. So, how can you address those fears and anxieties about longevity in retirement? Repositioning the planning process as securing insurance for a client’s future can help conversations feel more positive.
Another client bias to consider is risk aversion. For example, losing $100 may feel worse to someone than it feels to gain $100.
Tip: To help overcome risk aversion when talking with clients about annuities, try focusing on the enhanced financial security a guaranteed retirement paycheck can provide.
Sensitive topics with complex psychological biases and triggers, from choice overload to deciding how long retirement savings will need to last, may stop some client conversations in their tracks. Professor Hershfield explores these ideas and shares strategies financial professionals can use to help clients get past decision paralysis to making solid decisions for financial security in retirement.
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