Financial planner as Choice Architect

A way to help clients take ownership of their choices.

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Professor Albus Dumbledore advised Harry Potter, “It is our choices, Harry, that show what we truly are, far more than our abilities.” While the wisdom from Prof Dumbledore comes from one of the greatest fantasy stories of modern literature, the power of his words is in their application to real life. We are a product of our choices, good and bad. And when it comes to our life and money, we face choices daily. The same applies when a client goes to see a financial planner. Invariably they are faced with a choice. It may be a choice to do something or to do nothing. It may have to do with money. It may have to do with their life: past, present or future.

The role of the Choice Architect builds on that of the Thinking Partner.

A key role of a professional financial planner is to help clients make such choices. In doing so, I believe that financial planners are playing the role of Choice Architect, a label I first came across in the book Nudge, in which the authors Richard Thaler and Cass Sunstein suggest that a Choice Architect “has the responsibility for organising the context in which people make decisions”. In the last edition of Blue Chip, I suggested that financial planners play the role of Thinking Partner to help clients gain insights. As a Choice Architect, you help them make choices based on those insights. The role of the Choice Architect builds on that of the Thinking Partner.

The challenge is that humans make choices in both simple and complex ways. Our limbic system drives quick choices, while our prefrontal cortex enables us to make considered choices. The problem is that we often make a limbic-based decision thinking we are using our prefrontal cortex. We think we’ve thought about something when all we did was act on a cognitive or emotional bias. Often it’s not just greed or fear that drives our decisions, even those to do with investments. We can make cognitive errors without even knowing we’ve done so. A well-thought-out financial plan serves as a powerful tool to limit the influence of emotional and cognitive biases. Developing a financial plan forces clients to engage their prefrontal cortex.

In helping clients as a Choice Architect, financial planners can help their clients craft their choices so that their financial plan matches their ideal life. The challenge with drawing up a plan for a client’s life is that they are the real experts in their own life. As such they need to participate actively in the process if they are to take ownership of the plan. Anyone who has been involved in renovating or designing a new home or office knows that the decisions that need to be made seem endless. The architect guides these decisions, helping the client understand the implications of each decision from a cost, comfort, functional and aesthetic point of view. As a Choice Architect, financial planners do the same for their clients. Each decision the client makes has costs and benefits. Helping them find the trade-off between the two is central to the role of the professional financial planner.

Ideally, the truly professional financial planner accepts that they work in that middle ground between technical expertise and the need for the client to take ownership of their choices.

The challenge for clients is that they may be exposed to different types of financial advisors. For example, we know that robo-advisors make decisions based on the information provided and their algorithm engine. Financial advisors who see themselves as salespeople are likely to cheerlead whatever their client decides if this results in some form of transaction. An advisor who regards themselves as a technical expert may be tempted to make the choices for their clients. They may listen to what the client wants or needs, but ultimately, they see themselves more as a choice specialist rather than a Choice Architect. They know best. Ideally, the truly professional financial planner accepts that they work in that middle ground between technical expertise and the need for the client to take ownership of their choices.

Professional financial planners advise clients on their choices, without making decisions on behalf of their clients. They may use their technical skill to help clients make informed choices, but if they want the client to take ownership of their choices, the key ingredient for success is working collaboratively with clients. Collaboration is at the core of the work of a Thinking Partner. It helps mitigate against cognitive biases and if done well collaboration harnesses the reality that each of us sees the world uniquely. Collaborating is recognising and committing to the possibility that two minds are better than one.

Thaler and Sunstein confirm that if you influence other people’s choices, you are a Choice Architect. But very importantly, they point out that “since the choices you are influencing are going to be made by humans, you will want your architecture to reflect a good understanding of how humans behave”. Being an effective Choice Architect depends more on good human understanding and skill than technical knowledge and expertise. This can only be good news in a world where technology and AI threaten to eat the lunch of professions (like financial planning) that are built on the foundation of technical expertise. 

Rob Macdonald, Head of Strategic Advisory Services, Fundhouse
Rob Macdonald, Head of Strategic Advisory Services, Fundhouse

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