The recent backlash faced by the Federal Government in trying to repeal the FoFA legislation serves to highlight that consumers and industry experts still have doubts over the integrity of many financial advisors. These doubts have been further consolidated by the findings of the study Individual Judgement and Trust Formation: An Experimental Investigation of Online Financial Advice, undertaken by the ARC Centre of Excellence in Population Ageing Research.
Using an online incentivised discreet choice experiment, 1200 Australian respondents viewed videos of actors portraying financial advisors providing different quality advice on four topics. With research suggesting that, in theory and practice, advisers do not always provide the best advice to their clients (Australian Securities and Investment Commission 2012, Mullainathan et al. 2012), the aim was to test how well individuals evaluate the advice offered by advisers.
Trustworthiness is obviously necessary when choosing an adviser but a client’s perception of this can be skewed based on different factors, as shown during the experiment process. Each of the respondents viewed two videos of four possible ‘financial advisers’ giving advice on an array of topics and were then asked to nominate which advice they would follow. It was found that some had significant difficulty in discerning the quality of advice for some topics compared with others. When viewing more difficult topics, the number of respondents who struggled to choose the correct advice was greater than expected.
It was also noted that individuals were swayed by extraneous signals, such as preferring a younger adviser, or being more likely to choose advisers with certifications. Respondents also evaluated advice from the same adviser based on what had been given first. For example, if an adviser gave correct information on an easy topic initially, the individual was more likely to accept follow on advice, even if it was not fully understood. Because the respondent couldn’t tell if the new advice was good or bad, they based their response on their prior view.
The overall findings of the survey suggest that individuals need help choosing advisers because they can be easily led to trust advisers, regardless of information given.
Read the full working paper at CEPAR.edu.au.
In its 2014 Insights Survey, YOURLifeChoices found that 56 per cent of respondents thought they were sufficiently financially literate to handle their retirement income needs without professional advice. If the findings from the CEPAR study are indicative of the wider population, then this is indeed concerning and would indicate that a greater level of legislation on financial advice is required, not lesser.