Financial advisors do a poor job in helping their clients achieve their goals largely because advisors focus on the wrong questions, maintains Dan Ariely, a behavioural economist at Duke University in North Carolina and author of Predictably Irrational: The Hidden Forces that Shape Our Decisions.

Writing in the Harvard Business Review, Ariely maintains that many advisors depend too heavily on conventional wisdom by often limiting their client discussions to two basic questions:

> How much of your current salary will you need in retirement?

> What is your risk attitude on, say, a 10-point scale?

Ariely believes that by employing such “add water and stir” analyses, advisors actually mislead clients into believing their affairs are in order when they’ve really only scratched the surface.

“Frankly, I think trained monkeys could do the same basic job [in] giving answers to those two questions,” he writes. “Certainly, algorithms can do it, probably with many fewer errors.”

Ariely maintains that clients often simply regurgitate what others have told them they will need in retirement, yet their answers are frequently too low when it comes to realistic estimates.

In his research, Ariely had asked these same two questions. The common answer to the first question was 75%, roughly the financial advisory industry’s standard rule of thumb.

But, when study participants were asked how they came up with this figure, the most common answer turned out to be that it was what the participants thought they should say, based on industry advertising and media reports.

The first problem, Ariely says, is that advisors are asking clients a question and they, in turn, answer with what they have been told is the right response.

Ariely then asked the same individuals where they wanted to live in retirement and what sort of lifestyle they expected, calculating future costs based on these answers. He discovered that they would actually need about 135% more than their initial estimate to fund their later years.

Ariely then turned to the risk question, varying the labels on the ends of a 10-point scale. The research team told some participants that the low end was 100% in cash and the high end was 85% in stocks and 15% in bonds. Others were told that the low end was 100% in bonds and the high end was 100% in derivatives.

Regardless of the labels, people chose a level of risk roughly around the mean, depending on whether they felt slightly more or slightly less willing to take risk than what they thought of as average.

The truth is, Ariely concluded, clients have no idea what their risk attitude is, and scaled questionnaires do little to guide them.

It’s really all about identifying opportunity costs, he maintains. Every time someone thinks about spending money now, they should be asking themselves what they won’t be able to afford in the future if they go ahead and make that purchase.

Rather than rely on simple-minded guidelines, Ariely suggests, advisors should earn their fees through nuanced conversations, realistically mapping current and future expenses as well as future income.

“It is possible that the best financial advisors already do help in this way,” he notes, “but the industry as a whole does not.” IE