Decisions, decisions

There's been some grave news this month.

According to research from Dunstan Thomas, 33 per cent of financial product providers believe that the Retail Distribution Review (RDR) will reduce their profit margins. Furthermore 31.5 per cent of providers also see disclosure issues (around key features illustrations and statutory money purchase illustrations) as the most difficult changes to implement.

That's right, folks: close to one in three providers (of the financial products that we rely on to hold our hard-earned beans) are struggling to implement changes intended to increase transparency and fairness.

I can only imagine your shock.

I have always assumed that providers designed and distributed products to improve the well-being of the nation. Yet these statistics imply that for the past few decades some companies may have conspired to sell complicated and opaque products to retail customers with the sole intention of producing a profit for their own pockets.

That said, I've also always assumed that payday loans are in my long-term interest because the TV ads are softly lit, with empathetic voice-overs about how difficult it is to cope. You know, when you have to wait ten days before you can buy something you don't need? It's a nightmare.

Bad habits

Every cloud has a silver lining, though, and there has undoubtedly been a profound shift in the UK financial industry away from the darkness and towards the light. All that's left now is for us, as professional financial advisers, to embrace what has always been the case: that the true value we bring is to be found not in the management of investments, but of investors.

This is, in my view, the most important achievement of RDR: relegating financial products to a second-tier issue (mainly about function and service), and promoting financial planning, with its focus on individuals and how they can best achieve their desired outcomes, to front and centre.

The sad truth is, the greater number of individuals can and do lose more of their wealth through ineffective ('bad') financial habits than through holding poorly designed and expensively executed financial products.

Bad financial behaviour has the capacity to ruin lives with stealth and without the headlines. The commendable market-level changes heralded by the RDR's arrival will go a long way to minimising the possibility of clients receiving bad advice or seeing their wealth eroded by high hidden charges. But they will not change a fundamental aspect of human nature: we haven't evolved to be very good at making decisions.

Irrational fear

Behavioural economics is an exciting and emerging area of academic research. In psychologist Daniel Kahneman's book Thinking, Fast and Slow, he examines the evidence for the many ways in which our biology works against us. It's a kind of misguided but well-intentioned attempt to save our species from extinction. Here are just some habits that we all regularly employ:

• We use feelings not logic to make snap decisions, even when we don't need to.

• We have a habit of focusing on one salient point and ignoring all others.

• We see insightful information in random rubbish.

• We believe that everyone else has biases, but not ourselves.

• We have an irrationally large fear of extreme events.

• We are woeful at predicting the future, but massively overestimate our ability to do so.

Perhaps then, with RDR behind us, professional advisers will focus on the positive role they can play in educating clients about why they do what they do, and how this impacts their financial well-being, both now and in their future.

The best financial advisers I know and respect have always behaved as client leaders, and not product sellers. Effective advice can only be given by an adviser with a clear and comprehensive understanding of an individual's circumstances and requirements; this includes how that individual is predisposed to taking irrational decisions because of their natural susceptibility to some or all of the traits listed above.

Financial planning is our trusted guide through the mass of data and news sources that pervade our modern lives, armed as we are with hardwired psychological fallibility and deep-seated cognitive biases.

Steven Hennessy is a chartered financial planner and associate director at Myers Davison Ginger

Read the Dunstan Thomas research here

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