We know too many choices often result in a “paralysis of analysis” by consumers, frozen in place and unable to do what’s right for their particular situation. It’s something that certainly applies to 401k investment options, a point backed by recent research from Cerulli Associates.
The takeaway? Less is more in investment menu design.
Cerulli, a global research and consulting firm, finds that when faced with an overwhelming amount of options, consumers will frequently revert to suboptimal biases to help make their decision processes less taxing.
“With access to nearly unlimited data, investors can easily find themselves overwhelmed rather than informed,” Scott Smith, director at Cerulli, said in a statement. “Retail investors have access to an astounding array of product and service platforms, but they struggle to find the solution within the industry landscape that is best suited to meet their individual financial wants and needs.”
By incorporating what’s known as active choice architecture, he added, providers can leverage whatever information they can glean through each interaction to more appropriately frame inquiries to a segmented client base.
Choice architecture is the careful design of the environments in which people make choices to influence better decision-making, according to Nobel Prize-winning behavioral economist Richard Thaler.
“By doing so, providers are able to limit the number of choices offered to those most likely to be of interest, and structure the order in which they are presented to streamline investors’ product and platform decisions.”
“We believe providers can optimize their own success and the outcomes of their investors by segmenting their addressable market through an advice orientation lens, with a choice architecture overlay, to help expediently guide prospective clients to the platform and product solutions most likely to best meet their preferences,” says Smith.
Cerulli’s latest report, “U.S. Retail Investor Products and Platforms 2018: Defining Client Experience Through Choice Architecture,” is designed to help product manufacturers and distributors understand retail investors’ product preferences, product use, and product needs to better inform product development and distribution initiatives.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
