We were intrigued with a recent report from the Collins Institute on Equipping Citizens to Deal with Financial Choice. We were not impressed with its error-ridden editing (duplicated paragraphs); nor its use of awkward analogies (comparing mortgages to tyres and pensions to petrol); nor its clunky English. But we did like its conclusion – that consumers need more financial education. Interestingly, the report contends that the Central Bank should have absolutely no role to play in providing consumer learning!!
Surprisingly, the report did not draw on the findings of an ESRI experiment conducted in 2016, which sought to answer the question – “At what point do products become too complex for consumers to choose accurately between the good ones and the bad ones?” A key discovery was that consumers’ judgements of the value of products against prices are inaccurate.
In addition, the report learned nothing from MMPI’s experience in dealing with consumers at the coal face. We have long recognised that the human brain behaves in strange and irrational ways – especially when presented with decision-making that is outside the individual’s normal comfort zone. While the ESRI experiment did not concentrate on financial products the findings did raise questions about how consumers respond to variables offered by banks and insurance companies.
The Collins Institute report calls for a renewed source of neutral financial information and education – with easy-to-read guides and explanations on financial products and services. MMPI welcomes the report’s findings and supports further education……but.
Many consumers struggle to choose the best products for themselves and often make costly mistakes. For example, many consumers believe they have become expert at purchasing insurance online – often selecting the cheapest option having no regard for the consequences in the event of a claim. Consumers are prone to bias – “cheapest is best because I’m short of money this month.”
In trying to select good from bad, consumers often flock to the middle ground in the mistaken belief that the dearest offers poor value-for-money and the cheapest is of inferior quality. The mid-priced option is lazily chosen in the misguided assumption that it offers fair value.
Mostly these types of consumer behaviours are in response to a simple lack of understanding. Consumers find finance complex. They find the language and jargon very confusing and they just don’t get the maths.
It is admirable that would-be policy makers care about consumer protection but the isolated focus on price tables and “cheapest is best” philosophy does not serve consumers well. Consumers need protection when making decisions. Explanatory leaflets including charts and graphs may help but a friendly financial adviser works best of all.
MMPI suggests that good quality advice that is delivered in face-to-face consultations between financial professionals and consumers is the only way for consumers to truly appreciate the value of the differences in product attributes.
Consumers do not need to pass financial driving tests, as the report suggests. They do not need to be proficient at financial numbers to understand quality advice provided by quality professionals.