Behavioral finance research has played a part in the accumulation of billions of dollars through auto enrollment and auto contribution escalation, says Allianz Global Investors Distributors CEO Brian Gaffney.
Brian Gaffney on Behavioral Finance Research in Retirement Planning Christine Benz: Hi I’m Christine Benz for Morningstar.com. We’re here at the financial behavior and retirement summit and I’m joined to day by Brian Gaffney he is the CEO of Allianz Global Investments. Brian thanks so much for being here today. Brian Gaffney: My pleasure Christine. Christine: So you and your firm Brian have recently done a lot of work on the area of behavioral finance. Now I’m wondering if you can talk about some of the key take aways from all that research? Brian: Yeah the purpose. The reason that we’ve done the study is there’s 79 million people heading for retirement and many of them are very poorly prepared. The Department of Labor is concerned the Department of Treasury so the issue to request for information and our view was if we put our asset management lens on and we could give some technical guidance but we felt that was better to understand that decision making is critical to the end results of being able to retire with dignity so we engage Professor Shlomoe Bernartzi engage 10 experts near the behavioral finace in our response to just understand particularly how people make decisions after they stop working and their in retirement. Christine: Right so one of the things that you brought out in your presentation was extreme loss aversion on the part of some retiree so they would rather risk nothing even if it means a minimal or zero gain. How does the financial services industry combat that tendency how do you work against that and get retirees to appropriate risks? Brian: Well the common set of understanding is up until the most recent study was that people are twice as averse to risk so you feel the pain of loss twice as much as you feel the gain of winning $100. the importance of understanding as it relates to how we create solutions is that when you’re asking people to make decisions about giving up control of their assets, giving up control for protection people see that as loss and so the solution need to be framed in a way that liquidity maybe available rather than giving up complete control or encouraging a feeling that could very much feel like loss but you don’t know it in the way you construct it’s products. Christine: So related question Brian is how you see the financial services landscape evolving so that insurance products increasingly intersect with traditional financial products like stocks and bonds? Brian: In many cases they do already today in the case of variable annuities. The underlying investments are typical asset management investments but the proper solutions may entail a deeper combination between the two for example totally different regulatory bodies on the asset management side than you do on the insurance side. Insurances regulated by state governments so generating the expertise on both the asset management and the insurance features is a challenge for the industry but the correct solutions will involve elements of insurance that may not even be engineered or manufactured today in conjunction with discussion with us at management firms with an understanding how people behave and make decisions to craft and create engineer better solutions than include both. Christine: And it seems like one challenge right now is that a lot of advisers aren’t conversant in both types of products. Brian: Right. Christine: So Brian you also talked about what you perceived as some real successes drawing from the world behavioral finance and putting them in place in the financial services industry can you talk about some of those? Brian: Some of the studies regarding things like inertia addressed the deferral rates. Deferral rates are remarkably low in the 401k world the introduction of auto enrollment was a function of work done by behavioral scientist and it showed that if you had to do something you were less likely to take the appropriate action so auto enrollment emerge and became part of the pension for protection act and that was delivered by behavioral finance. A study have saved more for tomorrow was an exercise to try to get people to make decisions of an increasing or escalating their contributions down the road because we asked them today people can’t find things in the future that are more important or interesting than what they’re doing today. So if you ask them today will you defer in the future they’ll say yes but if you ask them today will you increase your rate of deferral they’ll say no. So again behavioral finances played a part actually in accumulation of billions of dollars as a result of auto enrollment and auto escalation we think there’s a lot more that can be done. Christine: Well Brian great research thanks for sharing your insights today we appreciate it. Brian: Thanks for having me. I appreciate it.