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Financial advisors can use tricks to manipulate major decisions by vulnerable clients – new research

A LARGE proportion of Australians are unable to tell the difference between good and bad financial advice and are unaware of techniques used by advisors to manipulate critical financial decisions, according to a major University of Sydney study.

In the wake of the study, University of Sydney Business School professor Susan Thorp has called for a tightening of regulations to protect what she calls “vulnerable” clients. 

Working with Prof. Thorp on the research project were Prof. Julie Agnew of the College of William and Mary, Virginia, USA; University of NSW’s (UNSW’s) Prof. Hazel Bateman; Dr Christine Eckert of the University of Technology Sydney (UTS) Business School; the Australian National University’s (ANU’s) Dr Fedor Iskhakov and Prof. Jordan Louviere of the University of South Australia.

Prof. Thorp said almost half of all Australians suffer from poor levels of financially literacy and many turn to financial advisors for help with decisions on such things as superannuation investments.

“Even before our research began, we were aware that many people who attend financial advisors view the advice that they are given as very good even when an objective evaluation of that advice found it not to be so,” Prof. Thorp said.

“Puzzled by this,” she said, the research team set out to “unpack the process by which this trust relationship between the advisor and the client was formed”.

The researchers produced videos of a number of advisors, some providing good and others providing bad financial advice. The videos were then shown to groups of people who were asked to identify which of the advisors they would trust.

“We found that people, on the whole, were able to tell the difference between good and bad advice on the topics that were relatively straightforward such as paying off credit card debts,” Prof. Thorp said. “But when it came to more complicated decisions, like superannuation investments, far fewer people were able to tell the difference between good and bad advice.”

TRUST MANIPULATED

The research found that trust in the advisors was easily manipulated.

“We were able to show that if an advisor gave good advice on an easy topic, that formed a good impression in the mind of the client, and they continued to trust that advisor, even when they gave them bad advice down the track,” Prof. Thorp said.

“It seems that this strategy is probably quite widely used and would be influencing people’s decision making.”

The research also measured the impact of showing clients an advisor’s qualifications.

“One of the things we were able to do in this experimental context was measure the impact of a certification and we found that displaying a qualification made people more willing to follow advice than they otherwise would be,” Prof. Thorp said.

She said clients were often unable to tell the difference between genuine and fake qualifications.

Prof. Thorp believes her research indicated a need for higher qualifications and standards for financial advisors. She has also called on the advisory industry and regulators such as ASIC to more rigorously enforce laws protecting consumers.

“A lot of people are aware of being modestly manipulated by an advisor,” Prof. Thorp concluded.

“What’s important here is that the skill gap between the client and the advisor can be large. The potential for misunderstanding or manipulation is quite high in this situation. In other words, clients are vulnerable so they need to be properly protected.”

www.sydney.edu.au

 

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