Views on improving the integrity of global capital markets
21 October 2020

The Power of Nudges in Financial Advice

Nudging must be used to balance integrity, client best interest, and profit

When was the last time you felt pressed to buy something, whether it was a Christmas gift or a financial product? Perhaps, you felt like you would miss out on a special opportunity or experience if you did not participate in the offer. Whenever you are led to believe something is available only for a short period of time or in a limited quantity, you are being nudged to give it more importance and attention. This is one of several tools used to influence consumer behaviour to buy something that otherwise may be ignored.

Many people do not realize this, but we often are swayed in our decision-making processes by our emotions, the methods by which products or services are marketed to us, and the context of our current situation or surroundings. Nudges strategically and effectively make use of biases and mental shortcuts to influence behaviour and decisions while preserving freedom of choice.

Since the 2008 publication of Nudge by Richard Thaler and Cass Sunstein, interest has grown around the world in the art of applying behavioural science to areas of public policy. Behavioural science examines how psychology, behavioural biases, and organizational and group behaviour affect decision making. In 2010, the UK government established a behavioural insights team, also known as the Nudge Unit, to improve government services and public policies in areas ranging from health, environment, and transportation to energy and finance.

Many countries have followed suit with the establishment of behavioural science units, applying nudge techniques in policy measures. Some strategies to guide people into better behaviour include the following: nudge energy-saving by delivering to households a personalized report that grades the household’s energy consumption and compares its performance with that of their neighbours; nudge traffic safety by putting up speed feedback signs to lower risk of accidents when driving; and nudge healthier food choices in school cafeterias by displaying healthy snacks closer and junk food farther away from cash registers.

Behavioural insights and financial regulation

Financial regulators are increasingly using behavioural science to enhance their understanding of both consumer and financial firm behaviour. By analysing patterns of how investors perceive, interpret, and react to situations, regulators can better understand investor behaviour, biases, and financial decision making. In a similar way, by analysing how financial firms perceive and react to situations and policies, regulators can enhance financial supervision and better influence a firm’s culture. The intended regulatory outcomes from the application of behavioural sciences are to strengthen investor protection, improve investor education, and enhance policy and regulation. Some markets that have established behavioural science units within a financial regulator include the United Kingdom, the Netherlands, Canada, Australia, and Singapore.

Among Asia’s financial regulators, the Monetary Authority of Singapore (MAS) is at the forefront in applying behavioural sciences. In 2019, the MAS established a behavioural science unit that applies behavioural insight techniques from social-psychology disciplines to gain an understanding of the behaviour and biases of consumers and businesses. MAS Managing Director Ravi Menon noted that the behavioural science unit will expand its capabilities and support supervisors with methodologies to better understand conduct and cultural issues in financial institutions.

In view of how behavioural science can help us better understand human behavioural patterns and decision making, more Asian financial regulators should consider a behavioural science approach to conducting risk supervision and enhancement of culture at financial institutions.

Dark side of nudges in financial advice

If the intention of nudges is to help people make better choices to improve their welfare, then outcomes are in the public interest. Nudges become contentious, however, when they are used with bad intentions.

Within financial advisory services, the advisor–client relationship generally is built through time and trust. Even though robo-advisory services have been growing rapidly in the past decade, most people still value and favour human interaction when receiving financial advice. They expect financial advisors to use their knowledge and expertise to advise and recommend suitable financial products in the best interest of clients. The inherent conflict of interest in an advisor–client relationship is that the product that may be in the client’s best interest may generate a lower profit or commission for the financial advisor, compared to other available products.

The use of nudges by financial firms and advisors mainly for their own profit can lead to customer exploitation. Over the years, many financial scandals have exposed how aggressive sales-driven cultures at organizations have led financial advisors awry as they work to meet sales targets. In markets with commission-based advice models, an advisor can strategically use nudges to influence customers to buy more financial products that generate higher fees and sales incentives for the advisor but that are not in the customer’s best interest.

Common nudges that financial advisors may use involve the way information is presented, such as limiting the choice of available or alternative investment products, providing short time windows in which to purchase a product, or cross-selling internal products and services to clients. The choice ultimately belongs to the client, but the advisor’s nudge can drive them to make certain decisions.

When it comes to investments, even the best-informed individuals can be influenced in their decision making. Nudging is a powerful tool and must be used by companies and financial advisors with good intentions to balance integrity, client best interest, and profit.


Photo Credit @ Getty Images / sefa ozel

About the Author(s)
Sara Cheng, JD

Sara Cheng, JD, is Senior Director of Capital Markets Policy and Strategy, Asia Pacific. She is responsible for advocating policy development in Asia Pacific, writing research centered on capital markets and financial regulation, and engaging with financial regulators and standard-setting bodies on policy advocacy. Cheng's work experience spans close to 20 years in the finance industry. She's worked in investment banking, legal, compliance, and securities regulation. Before CFA Institute, she worked in the CEO office of the Hong Kong Securities and Futures Commission from 2012 to 2017. She also previously worked at Goldman Sachs in New York, Mumbai, and Hong Kong where she held a range of diverse compliance roles in asset management, investment banking, and research. Cheng also previously worked as a US corporate lawyer and holds licenses in the states of New York and New Jersey. She is a strong supporter of diversity and mentoring. While at the Securities and Futures Commission, she founded and chaired the Women’s Network for which she received the 2015 Employee Award for outstanding contribution to the SFC.

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