Regulators shouldn’t just be trying to use insights from behavioural economics to nudge investors to make better decisions, they could be used more extensively to guide the behaviour of financial advisors, too, says Rhonda Goldberg, director, investment funds branch, Ontario Securities Commission (OSC).
Speaking Tuesday at OSC Dialogue 2013 in Toronto, Goldberg said that regulators should be thinking about the ways that behavioural economics could be used by regulators to impact advisors’ behaviour. She made the remarks during a session at the conference that focused on the role of behavioural economics in investor protection.
In general, she noted, regulators have used behavioural economics to understand and help shape the behaviour of investors. For example, research into how investors find and use disclosure has helped dictate the content of regulatory disclosure requirements in both the new Fund Facts documents, and in the cost and performance reporting requirements introduced as part of phase two of the Client Relationship Model (CRM 2).
However, perhaps these sorts of insights should also be used to impact advisor behaviour in certain ways, too, she suggested.
For instance, one of the oft-cited uses of behavioural economics is to try to achieve certain policy outcomes through the setting of default options, in the understanding that people often stick to the defaults they are provided. Goldberg suggested that regulators could do things like setting a certain compensation model for advisors as a default; if they thought this could improve investor protection.
At this point, regulators aren’t proposing that sort of intervention — indeed, she stressed that regulators first need to figure out just what sort of outcomes they want to see, before trying to craft a nudge to help get investors there — but this is an example of the sort of thing they could do.
On the same panel, Paul Bates, director of the OSC’s Investor Advisory Panel, noted that the panel is about to embark on some research into the titles that advisors use, and how that may influence how clients think about their advisors.
Doug Steiner, principal at behavioural economics consultancy, BEworks, suggested that nudges can be used to address the fact that most people simply don’t save enough, by pushing investors to make better decisions about the tradeoff between short-term consumption and long-term savings.
One way to do that, Steiner suggested, is to force investors to think about their likely life expectancy, the specific things they imagine doing with their lives during this period, and how much it’s likely to cost to meet their needs. Then, they can be encouraged to make better decisions by using the understanding of how social norms influence behaviour — for example, by showing under-saved investors what others in the same age range, and income bracket have saved, and what their portfolios look like, in order to push them toward better saving decisions.