Adviser firms need to follow regulatory trajectory on suitability to avoid non-compliance – Oxford Risk

by | Mar 27, 2024

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Adviser firms need to adapt to changes in the regulatory approach to client investment suitability assessments and move away from a product-specific focus, behavioural finance experts Oxford Risk say.

The Financial Conduct Authority’s Consumer Duty rules in the UK and the European Union’s MiFID II updated guidelines from last April have continued to follow a common trajectory which focuses amongst other things on robustness and rigour around client investment suitability, and a more holistic view of client needs and preferences.

Oxford Risk welcomes this direction from regulators but is concerned that advisers and wealth managers could be on dangerous ground if they simply look to apply a tick-box approach instead of embracing the spirit in which the regulation has been created.

 
 

It has launched a new guide, More Than Mere Measurement: Guide to Client Investment Suitability, which emphasises that individual measures of risk tolerance, risk capacity, behavioural capacity, knowledge and experience, and sustainability preferences need to be combined into a holistic suitable risk level. Measuring each component in isolation risks missing the overall intention to produce better outcomes for investors throughout their investment journey.

Dr Greg B Davies, Head of Behavioural Finance, Oxford Risk said: “Investments are owned by investors, not robots. Assessing who that investor is, what those investments are, and how one is suitable for the other before and during an investment journey, is a scientific study of investor behaviour.

“Assessments should help advisers understand both a client’s financial personality and their financial circumstances.Crucially, individual assessments need to fit together within a robust methodology for determining the suitable level of risk for an investor to take right now. A random selection of instruments can’t claim to be an orchestra.”

 
 

Based on market-leading behavioural research, Oxford Risk’s suitability and sustainability tools continue to evolve, providing solid scientific grounding to questions of how much sustainable investing is suitable, and how much assets should be weighted towards specifically environmental causes. 

The company, which builds software to help wealth managers and other financial services companies assist their clients in making the best financial decisions in the face of complexity, uncertainty, and behavioural biases, has developed proprietary algorithms which rank products, communications, and interventions for their suitability for each client at a particular time.

It believes the best solution for each investor needs to be anchored on a holistic view combining stable and accurate measures of Risk Tolerance, an understanding of their overall financial circumstances, and knowledge and experience. Behavioural assessments of financial personality then add the opportunity for investors to learn about their own attitudes, emotions, and biases, helping them prepare for any potential anxiety that is likely to arise. This should be used to help investors control their emotions, not define the suitable risk of the portfolio itself.

 
 

   

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