Wealth advisers risk failing investors on ESG suitability tech – #WorldEarthDay

by | Apr 22, 2022

Share this article

This article features as part of IFA Magazine’s celebration of World Earth Day

Tech is too often a blindfold when it should be a microscope, Oxford Risk warns

Wealth advisers risk failing investors on suitability by not using technology appropriately to measure ESG preferences and being caught up in the ‘green rush’, behavioural finance experts Oxford Risk warns.

It argues that tech should be used as a microscope to determine investors’ ESG preferences but too often is acting as a blindfold with the risk that investors are not being matched to the right investments for them.

 
 

Oxford Risk is urging wealth advisers to make better use of technology to provide improved services to clients based around understanding their needs through detailed profiling.

Key problems it highlights include poor ESG labelling on funds which are becoming as “meaningless as the word natural on a food label” and failing to record investors’ individual preferences which are often complex and contradictory.

It warns that a focus on what can be measured risks products being developed not to help investors meet their social goals, but to game the measurement system.

 
 

Oxford Risk’s research shows most investors want the emotional comfort that ESG investments do what they claim to do and seek independent parties they can trust to verify those claims. The onus is on wealth advisers to match suitable ESG solutions to individual preferences. However, properly constructed ESG profiling provides a double bonus for wealth managers by increasing the amount investors put in ESG investments by up to four times and making investors with high ESG preferences much more likely to invest overall.

Greg B Davies, PhD, Head of Behavioural Finance, Oxford Risk said: “As the ESG industry expands, so does recognition of its darker elements. There are signs of trouble ahead.

“And it’s likely to be unsuspecting and unsatisfied investors left picking up the tab. Investor demand for investments with some sort of socially conscious edge is obviously rising. But it is in asking: ‘what is it, exactly, that they want?’ that we start to see difficulties.”

 
 

Oxford Risk believes advisers need to determine how much ESG the investor should have, and then how much the investor is prepared to balance greater impact against financial returns.

Advisers then need to select investments based on investor preferences including considering their relative focus on E vs. S vs. G.

Oxford Risk’s behavioural tools assess financial personality and preferences as well as changes in investors’ financial situations and, supplemented with other behavioural information and demographics, build a comprehensive profile. Oxford Risk’s financial personality tests can measure up to 18 distinct dimensions, of which six reflect preferences for ESG investing.

It believes the best investment solution for each investor needs to be anchored on stable and accurate measures of risk tolerance. Behavioural profiling then provides an opportunity for investors to learn about their own attitudes, emotions, and biases, helping them prepare for the 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.

Share this article

Related articles

IFAM 127 | Not if, but when | April 2024

IFAM 127 | Not if, but when | April 2024

Not if, but when… Spring finally seems to have arrived! Since our last edition, we have had the Spring Budget and the Bank of England (BoE) rate announcement to name but a few important landmarks. This has kept us, like all of you I am sure, quite busy over the last...

Sign up to the IFA Magazine Newsletter

Trending articles

IFA Talk logo

IFA Talk is our flagship podcast, that fits perfectly into your busy life, bringing the latest insight, analysis, news and interviews to you, wherever you are.

IFA Talk Podcast - listen to the latest episode

x