Choice – a mass of contradictions
I’ve noted before that choice is something we feel we cannot do without but is something we generally cannot deal with.
It is rare that the phrase ” I had no choice” is used in a positive sense, but how many times do people tell us they were faced with an impossible choice. People aspire to make informed choice but we know that even when they do, they are beset by “regret risk” for the choices they could have taken.
It becomes harder with age!
As we grow older, choices become harder, as we know the consequences of getting it wrong outweigh the upside of getting things right. There are more losers than winners wherever- X-factor, the FA cup, Strictly come dancing, workplace pensions.
Faced with the slim chances of making the right choice on their own, most people look for advice, I looked at the twitter profiles of the three x-factor finalists last night and found that one had more followers than the other two together. If there is wisdom in the crowds, Johnson will win tonight, I choose winners.
If we ask the audience, it is the shape of the graph we look at, we don’t ask whether there is a bias in the audience that makes them collectively wrong, we assume they will collectively be right. The audience’s wrong answer is an even dispersal of choice.
These proxies for collective wisdom are obvious in all forms of web-based decision making. But to be wise,we need perfect markets, markets that aren’t distorted by short-term bias. Which is why I have been concerned by the perception among many of our introducers that NOW and People’s Pension are no longer good choices for their customers, because there is an overt cost of support. Conversely NEST and Legal and General have become better choices for there being no barrier to entry or use (in terms of direct fees).
Inefficient markets lead to distorted choices
The behavioural bias surrounds the difficulty for an intermediary in the direct payment to a third party other than the intermediary. The decision to recommend People’s or NOW involves a sharing of a spend on its service. So does the cost of employing Pension PlayPen or purchasing or renting software to manage auto-enrolment compliance.
The natural choice for an intermediary is the choice that captures revenue in its direction. There is a bias towards reward that is mitigated by an awareness of risk. The longer in tooth the intermediary, the less likely he or she will be to take reward for exposure to undefined risk.
Nowhere is risk higher for an intermediary than in the choice of providers. The intermediary has two options- firstly they can limit choice, typically through the use of a default workplace pension, or they can outsource choice – to an organisation prepared to take the risk of making recommendations. There is a third option which is to become an expert and deliver choice but this requires an investment.
What we are seeing in the auto-enrolment market is very little investment in the skills and knowledge needed to make choice, a large number of intermediaries looking to eliminate choice and a small amount of outsourcing of advice to those considered “expert”.
Choice and “informed choice’
There is a lot of concern that expertise is in short supply and what expertise there is, is being delivered in unconventional means (robo-advice). The barriers to choosing a workplace pension using a computer algorithm appear high, virtually speaking. The challenge for both the vendors and purchasers of “online due diligence” is to accept that both the research and the algorithm that delivers the recommendation “stacks up”.
Since it is now accepted that there is an advice gap between what the market wants and what the market is getting, it appears obvious that eventually robo-advice will get traction and people will come to rely on research delivered through “on-line decision trees”. But will the transition to computer driven recommendations be fast enough for the market, or is the rush of decisions needed to be taken by employers staging auto-enrolment in 2016 going to overwhelm market capacity? Will we have a capacity crunch?
That I think depends on the market’s capacity to promote choice in a way that makes it easy and natural to take.
Critically it needs the market to reform in a radical way around certain trusted sources. It is clear from all research that around 70% of decisions taken by employers on workplace pensions will be reliant on intermediaries, input from accountants, book-keepers and payroll agents looks critical to 60% and around 10% will be using conventional financial advisers.
Default or whole of market? A false polarisation
Currently, the majority of intermediaries (of all persuasions) are using default workplace pension providers with a “whole of market” option in reserve for insistent customers. By and large whole of market is out of the financial reach of most small employers.
I don’t think this polarisation between default and traditional whole of market advice is healthy, it is what is known as Hobson’s choice, where both options are unsatisfactory. What is needed is a way to access whole of market choice at a reasonable price, which is what robo-advice is designed to do.
I’ve no doubt that in a couple of years, with the Financial Advice Market Review, endorsing services like Pension PlayPen, people will be paying to use software that guides them down the right lines, documents the process and delivers staff with a reason why they will be investing as they will.
But will traction be quick enough, to prevent many employers making uninformed decisions or even ill-informed decisions? To a large extent , the market will decide. I believe in markets finding ways. Rivers flow to oceans , Johnsons win X-factors , the cream rises to the top of the bottle.
To the extent that choice – or at least affordable meaningful choice, is denied to those taking decisions, we have short-term market failure. Regulators need to be concerned about this and I know they are. The Pensions Regulator is calling on intermediaries defaulting employers to a single provider to issue a warning that “other providers may be available and may be better”. This is a start, it is unlikely to be enough.
Delivering the means to make informed choices
As I stated at the start of this blog, choice is contradictory, people love it and hate it. They love to have it, they hate to take it. The only way to square the circle is through presenting information in a way that enables people to make an informed choice.
That means getting inside the heads of decision makers and understanding how decisions can be made easy
That means ensuring that the decision making is high-grade and not just based solely on low-grade stuff (such as initial support costs),
That means getting the means to making choice available – available!
A reformed market
The reformed post RDR, post commission, post face to face advice market has yet to reform. I believe that it will reform around a few organisations capable of reaching the mass of intermediaries. It will include traditional payroll giants, most notably Sage but also Iris , Moneysoft, QTAC, Star and a handful of others.
It will be informed by the leading accountancy networks such as 20/20, ICAP, ANS, Peak and Tax Assist.
It will be informed by the Institutes, ICAEW,ICAS, ACCA, ICB and CIPP.
The remaining IFA networks -Intrinsic, Openwork, Lighthouse and the compliance networks of SimplyBiz and Three Sixty have a small but important part to play -at least in organising and delivering advice into the market.
But ultimately, there has to be conviction, skill and knowledge that is translated and delivered from the current “experts”, the large pension consultancies- to the fish and chip shop, to Flo the florist and those nannies and small business owners appearing on the Workie adverts.
People want and expect choice and if they don’t get it, they get disillusioned. They need to have choice made simple , but they will regret it if they find choices they were never offered which turn out were right for them. They may even ask why they weren’t offered those choices.
The means to take choices on workplace pensions exist, it is ready for action and awaiting deployment, if you have read this article, agree with its argument and want more information, you can send me an email on firstname.lastname@example.org .
Who will win the X-Factor?
Oh and take the poll now and check tomorrow if your choice matched that of the nation!