Financial advisers need to reframe their presentation of retirement advice to overcome entrenched client behavioural biases and “choice paralysis” caused by complex options and myriad products, according to
research by Industry Fund Services (IFS) and developed with Challenger, the listed funds management company specialising in retirement income.
The study, which has been exclusively obtained by The Inside Adviser, highlights client lack of understanding of the retirement system, which contributes to behavioural biases about complex, long-term decisions, such as feeling the impact of losses twice as much as that of gains, and focusing on immediate gains over long-term security and flexibility.
Dan Monheit, a behavioural scientist who worked on the report, says advisers need to be aware that advisers “cannot avoid” influencing preferences and shaping outcomes and use it to “frame choices in a way that aligns with people’s underlying preferences.”
Adrian Gervasoni, executive manager of advice services at IFS (pictured), says: “Retirement planning is about more than just financial modelling – it’s about helping retirees make confident decisions in the face of uncertainty. We want to move the conversation from product features and benefits to focus on consumer preferences, such as certainty and flexibility. Ultimately, the goal is to deliver greater confidence when entering into retirement.”
Gervasoni says “too few” clients coming up to retirement have previously seen a planner or understand the subject well enough to make well-informed decisions.
“The situation is not helped with superannuation benefits in most cases being represented as an account balance, rather than a projected retirement income,” he adds.
For example, according to University of NSW research, 57 per cent of retirees are unaware of lifetime income streams.
The research, titled “Have we been positioning retirement advice all wrong?”, was undertaken by IFS, whose members collectively manage up to $1.35 trillion, and Challenger, which has about $126 billion under management.
The focus on retirement planning is intensifying as around 2.5 million Australians, with about $3.25 trillion in assets, are expected to retire over the next decade. Research by market research company YouGov, in partnership with Challenger, found that 85 per cent of retirees are seeking greater clarity about their financial future, with nearly 80 per cent happier with a guaranteed income for life.
In addition to income, retirees are also often seeking answers to managing longevity, inflation and sequencing risks, access to capital, estate planning and possible Centrelink entitlements.
Similar research in the US found that income, rather than wealth, is the key outcome for retirees.
Retirees are confronted with a potentially bewildering range of income strategies including account-based pensions, transition to retirement pensions, lifetime annuities, hybrid income products and the age
pension.
There are also dozens of retirement products on offer from super and life insurers and, according to the regulator the Australian Prudential Regulation Authority (APRA), more than 600 multi-sector investment options.
“Rather than making it easier, it creates choice paralysis,” says Gervasoni. He says advisers should identify a client’s retirement income preferences. “For some, having certainty of income may be more
important than maximising income,” he says.
“We must account for behaviours and a client’s state of mind in the advice we provide,” he adds. “While income maximisation should be a core focus, we must account for the client who might panic and switch
to cash during a volatile market period. Theory and practice need to be considered together.”
The report recommends a strategy called “choice architecture,” which arranges options so that clients are discreetly directed towards a particular decision “without restricting choice”.
It involves addressing three issues, according to the report. They are:
1. Certainty: Balancing flexibility and certainty, while prioritising long-term income.
2. Balance: Providing access to capital, particularly for retirees who are less concerned about outliving their income.
3. Flexibility: Access to an account-based pension, where super savings are converted into a pension stream and drawn down. The trade-off can be a lack of income certainty and greater longevity
risk.
Adrian Aardoom, head of retirement partnerships at Challenger, says the approach helps remove complexity, simplify-decision-making and improve delivery, “while ensuring the trade-offs are easily understood and considered.”
Paul Moran, a financial adviser and principal of Moran Partners, warns: “Framing can be done to encourage to purchase, just as much to advise. Framing must be done in a way that takes on board all
objectives and goals.”
IFS’ Gervasoni says care must be taken to ensure choice framing is done ethically, but is confident that regulatory standards will prevent behavioural science being used to manipulate clients.
Andrew Saikal-Skea, of Saikal-Skea Independent Financial Advice, says the use of behavioural tools depends on the individual client. “You need to be aware of psychology and clients’ relationship with money,” he says. “But circumstances vary.”
David Pitt, executive advisor at Viridian Financial Group, adds: “I have seen a number of clients that struggle with investors’ biases, due the complexity of the Australian superannuation system. A lot of
them end up reverting to the ‘status quo bias,’ as they feel that if they do nothing, it can’t get any worse. Yet the benefit of using behavioural psychology will enable them to get past some of these
inherent biases to reach better outcomes.”
Pitt adds one of his favourite questions is to ask retiree clients: “What sort of grandparents do you want to be?” — a question he says “reframes retirement from numbers to values.”
“It moves the discussion beyond financial targets to the personal motivations that shape retirement outcomes – from helping grandchildren financially to prioritising time and connection over travel or lifestyle goals,” Pitt adds.