Like many of our peers we’ve highlighted the impact of negative interest rates on client returns. We recently looked at some solutions to the problems faced by investors. It’s interesting to see that there have been opportunities that have been created in this negative space. But how can we best engage with you in an understanding and taking advantage of these? This question prompted us to look at the factors driving an individual’s decision-making process. specially at the current time as well as how financial decisions are made.
The decision-making process
Decision-making process, customer journey, sales funnels, these are all variations on the same theme. The decision-making process is a psychological one. We assume from a behaviour or action taken that a decision has been made. It shows a commitment to an action. What is often referred to as the customer buying process, is itself a decision-making process. This is where we see the journey a customer goes through before purchasing a product. The easiest way to look at it is using the AIDA structure.
- Awareness: Recognition of a need or problem
- Interest: Seeking information on the various options available to solve the problem
- Desire: Evaluation of options and a preference develops
- Action: Reaching of a decision and the purchase is completed
We are all consumers and are more informed than ever before. That is why our job as financial advisers is not to sell a product to you. It is to understand the process you go through to reach a decision. It is also to recognise the need you are trying to fulfil, whether this is protecting your family or planning for your retirement. We must work with you through this process to assist you in defining the need and to provide the best advice on the solutions available.
The role of behavioural finance
So, what does behavioural finance have to do with anything? We should recognise that not everyone is approaching a financial purchase from the same starting point. Traditional theories were very functional. They assume financial decisions were made against a rational background – both for internal and external factors.
Behavioural finance goes against this by asserting that financial decisions are often based on emotional responses. For example, you purchase protection on your own life to protect your loved ones. This holds true also for investments where investors may hold losing positions rather than feel the pain of taking a loss or the emotional instinct to move with the herd may explain why investors buy in bull markets and sell in bear markets.
Understanding how this impacts financial decisions around things like investments, risk, protection, and personal debt is critical to being able to provide a better service to our clients. Human emotion plays an incredibly influential role in these decisions. We have come through a time of crisis and while there is still much uncertainty there are opportunities.
What is the opportunity?
It is a time of negative interest rates. The Covid-19 pandemic shocked the world and is continuing to do so. We will be dealing with the fall-out for many years to come. Following our lives being put on hold, there is a huge amount of money on deposit earning no return but there are opportunities for those to make their money work harder. This is true too for those who wish to continue the savings habit they have now started. By combining an understanding of buying processes with the concept that financial decisions are emotionally based allows us to work with our clients in helping them make more rational decision in their financial matters. This is particularly relevant at the current time.
With negative interest rates, investors are faced with a choice. This choice is between a sure loss or exposure to a possible greater loss by choosing stocks. What is the best course of action? By following a well- thought-out strategy for gradually drip feeding into the markets to benefit from potentially greater returns can be an excellent route to follow. This type of unit cost averaging may dampen volatility and is applicable regardless of overall risk attitude.
If you’re not sure what direction to follow with your financial decisions, we’re here to help. Just get in touch for an initial chat.