Focus on Financial Planning

Keith Costello

Keith Costello is president and CEO of the Canadian Institute of Financial Planners (CIFPs) and the Canadian Institute of Financial Planning (CIFP). Over the past 15 years, Costello has led the creation of educational solutions, practitioner support services and advocacy support for financial planners.

Financial planners and financial advisors can use behavioural psychology enabled by technology to help clients save more for retirement

By Keith Costello |

Many behavioural research studies have focused on methods to motivate consumers to increase their savings rate for retirement. But evolving technology has now enabled the application of one unique approach for a research study — and financial planners and financial advisors need to understand the investor psychology findings of this research and how they can assist their clients in increasing their retirement savings rate.

The study out of Stanford University in California, entitled Increasing Saving Behaviour Through Age-Progressed Rendering of The Future Self, builds upon earlier research, which finds that people use excessive discounting of the future to defer decisions on retirement savings. This simply means that people cannot connect to the future, so the lure of immediate benefits by spending their current earnings today greatly outweighs the benefits of future retirement income.

Research on remedies to this dilemma has focused on two traditional areas. The first is to reduce this lure of immediacy through pre-commitment toward saving for the future. An example is when joining a company's savings plan, or opening a retirement account with a financial planner, and the person agrees to a monthly savings plan. The second is to increase the appeal of waiting to spend, and the expected enjoyment of future spending, by directing the consumer's imagination toward future uses of money. Life planning attempts interventions that encourage people to elaborate on the positive future consequences of waiting to spend their money.

The Stanford University research focuses on a third, and a complementary route to these aforementioned remedies, by trying to create a connection between the present and future selves of potential savers for retirement. There are two interesting outcomes from this research that financial planners and advisors should consider when dealing with their existing or future clients:

1. People usually only consider their commitment to save once and usually don't revisit their decision; so, you may have only one chance to influence their behaviour.

2. If people don't have an emotional connection between their current selves and their future selves, they will not care about their future well being.

By understanding the research study's methods, financial planners and advisors can discover ways to apply these techniques to help their clients increase their savings for retirement.

Specifically, the study used two methods to prove that having an emotional attachment between a person's current self and future self was the main factor in increasing someone's savings rate for retirement:

> Method 1 used aged-progressed renderings of people in the study by applying aging algorithms from a computer software program and Photoshop to create realistic pictures of the subjects at an advanced age. Avatars of each person's current self and future self were created. Using a virtual reality environment and headsets, two control groups were introduced into the research test area.

The first group were only shown simulations of their current self that would help them identify with their respective avatars. The second group were shown both simulations of their current and future self avatars for emotional connection. Members of each control group were asked during the simulations how much they would save for retirement. Members of the second control group — who had an emotional connection with their future self through the avatar — would significantly save more for retirement than those from the first control group. In fact, members of the second group who were only shown future self avatars of other people would not increase their retirement savings.

> Method 2 was less sophisticated from a technology perspective, and the experiment was delivered over the Internet to remove the bias or pressure of an in-person lab environment. The same pictures of current and future (aged) selves were shown to the participants. The difference in this experiment was that participants were given a retirement allocation slider that allowed them to allocate a percentage of their earnings at different salary levels.

When subjects allocated less to retirement savings, a sad picture of their future self would appear and, vice-versa, as too much was allocated to current spending. Eventually, during the exercise, the right balance between current spending and future savings showed a happy current self and future self. This experiment once again proved that an emotional connection between someone's current self and future self increases the desire to increase retirement savings.

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The main lesson for financial planners and advisors from this research is that they can stage successful client interventions to increase their clients' retirement savings through the use of technology, which is now more readily available and cost effective on both computers and smartphones.

It's also important to consider that although you may be successful in building a great investment portfolio for your clients, they still may not allocate the right amount toward retirement if you don't consider their underlying psychology to save for retirement.