Financial advisors often have clients who are too busy to deal with many of the numerous tasks that are required of them by their financial plans, as their cognitive and/or emotional plates are filled by the issues that take priority in their daily lives. In these situations, advisors can use ‘nudges’ as decision-making aids that automate processes for clients, simplifying routine tasks and helping clients to sidestep potential struggles with willpower, rewarding them with quick results with minimal effort… which, in many instances, is exactly what clients want!
Yet, while nudges can be very useful tools for helping clients to take action, advisors who rely on using nudges with their clients – but who also want to educate their clients – may find themselves challenged to find opportunities to explain the larger reason of ‘why’ behind the financial plan. This is because the primary utility of nudges is often simply to help automate tasks, not necessarily to educate clients. In fact, nudges are often effective precisely because they bypass the parts of our brains that require conscious thought! But without getting educated on why they need to do what their financial plan says is important, clients may ultimately struggle with developing the resiliency and financial self-efficacy that can be crucial to staying the course prescribed by their financial plans in the long run.
However, the reality is that not all nudges are designed equally – there are some nudges that can still be used effectively when the advisor’s intent is to educate clients. There are two dimensions used to characterize nudges, which include Type and Transparency.
Nudge Type refers to the level of conscious thought required to carry out an action; it includes Type 1 nudges (involving automated processes and subconscious decision-making) and Type 2 nudges (involving deliberative action and conscious thought). Nudge transparency, on the other hand, refers to whether the intention behind the nudge is communicated and made clear to the client; the intention of a Transparent nudge is made clear to and is understood by the client, while a Non-Transparent is not.
The significance of understanding nudge types and transparency is that while advisors can effectively use Non-Transparent nudges to support their clients by automating simple tasks, it’s the Transparent nudges (whether they are Type 1 or Type 2) that still force at least some level of conscious thought about the nudge, thereby fulfilling the advisor’s objective to not just help clients change their behavior but educate clients so that they truly understand how their financial plan recommendations are, in point of fact, designed to support their financial goals!
Ultimately, the key point is that, by understanding the psychology behind different styles of nudges, advisors can use these tools to help their clients achieve their financial goals… and still help clients get educated and understand the ‘why’ behind their financial plans. As while some recommendations can be simply nudged to help clients take action with minimal thought and with little regard to the underlying processes (e.g., to set up monthly savings deposits), others necessitate clients learning and accepting the reasons for the things their financial plans require of them (e.g., to review and discuss potential portfolio allocation changes). And with the ability to discern not just when to implement nudges, but also which types of nudges to use, advisors can better match the approach to when clients just need help getting something done, and when there’s an opportunity for them to get better educated along the way (and build their financial resiliency and self-efficacy in the process)!