Protecting Aging Investors through Behavioural Insights

Read the full report: Protecting Aging Investors through Behavioural Insights (OSC Staff Notice 11-790)

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Report released: November 9, 2020

Introduction

We are publishing Protecting Aging Investors through Behavioural Insights as part of the Ontario Securities Commission’s strategy and action plan to respond to the needs and priorities of Ontario seniors as outlined in our Seniors Strategy. This report identifies behaviourally informed techniques dealers and advisers can use to encourage their older clients to provide the necessary information for enhanced investor protection measures.

Background

A key component of the OSC’s Seniors Strategy is addressing issues of financial exploitation and diminished mental capacity in aging investors. To that end, the OSC, together with the CSA, has proposed amendments to securities law that will require registrants to take reasonable steps to obtain the name and contact information of a trusted contact person (TCP). A TCP is a resource for a registrantRegistrant A person or company that is registered with the securities regulator in the province or territory where they do business. They must be registered before they can legally sell securities or offering investment advice.+ read full definition to assist in protecting a client’s financial interests or assets when responding to possible circumstances of financial exploitation or concerns about declining mental capacity.

Purpose

Most investors would benefit from appointing a TCP, but people do not always act in their own best-interest. Behavioural insights reveal that individual decisions are not deliberate or rational in the way policymakers typically assume. When faced with novel decisions, people often rely on biased decision-making processes that can lead to suboptimal outcomes. The purpose of the research project was to understand the psychological, emotional, and social factors that may influence an older investor’s decisions and identify behaviourally informed ways of increasing the likelihood they will appoint a TCP.

Key Findings

A review of literature from behavioural science, psychology and economics revealed that there are several biases that have a greater impact on decision-making as individuals age. Some of the key biases that can affect investors willingness to appoint a TCP are:

Optimism Bias: The tendency for people to underestimate the likelihood of negative events. This can lead investors to underweight the risks associated with cognitive decline and financial exploitation.

Avoidance of Negative Emotions: People prevent themselves from thinking about situations that create unpleasant feelings. Investors may not consider the importance of appointing a TCP because it requires them to imagine bad things happening to them.

Illusory Superiority: The tendency for people to overestimate their qualities, in relation to the same qualities of other people. This can lead investors to think that others may need TCPs but not them.

Although TCP information can be solicited in many ways, our research revealed that financial advisors’ practices will most likely include presenting clients with a form. Embedding behavioural insights into the form can mitigate the impact of biases on investors’ decision-making processes.

We utilized an online experiment to determine if behaviourally-informed techniques could increase the likelihood that older Canadian investors would appoint a TCP when presented with a form asking them to do so. We tested nearly 900 Canadian investors older than 55 and found that a behaviourally-informed form increased the likelihood that an older client would appoint a TCP by a remarkable 23%.

Next Steps

The OSC encourages registrants to review the findings of the Protecting Aging Investors through Behavioural Insights and consider testing and, if proven effective, integrating the tactics suggested in the report into their current practices. The OSC remains committed to working towards a stronger and more secure financial future for all Ontario seniors. It looks forward to engaging with investors, registered dealers and advisers, their individual registrants and other stakeholders with respect to the research findings and its broader work to improve the investor experience.

Read the full report, Protecting Aging Investors through Behavioural Insights (OSC Staff Notice 11-790)

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