More than one in five retail investment clients don’t agree that their advisers understand their behavioural biases when making decisions, new research from behavioural finance experts Oxford Risk shows.
Its study with investment clients of wealth managers conducted ahead of the implementation of the new Consumer Duty rules on July 31st found 21% don’t agree their adviser has assessed how their characteristics can drive financial decision making.
Consumer Duty aims to increase consumer protection and promote fair practices in the financial services market requiring firms to act in good faith towards retail customers, avoid foreseeable harm, and enable and support customers to pursue their financial objectives.
Not understanding behavioural biases is now a key issue for advisers and wealth managers under the new Consumer Duty rules, which require firms to understand the issue and how it affects investors.
The Financial Conduct Authority rules say: “Firms must understand and take account of behavioural biases and the impact characteristics of vulnerability can have on consumer needs and decisions.”
Oxford Risk research with wealth managers shows they are concerned about the issue – over 73% believe emotional decision-making costs investors investment returns. Nearly two-thirds (63%) believe emotional decision-making costs the average investor over 100 basis points of investible wealth each year. Around 15% believe the cost is over 200 basis points on an annual basis.
However, only 75% of wealth managers questioned last year see one of their key roles as helping their clients manage their emotions when making investment decisions. 3% don’t believe this is part of their role, and 21% were neutral about whether it is or not.
Oxford Risk has developed its Investor Compass Risk Suitability solution to support advisers in adapting to Consumer Duty. It is an end-to-end risk profiling and suitability solution built on advanced behavioural finance. It helps outline an investor’s willingness and ability – both financial
and emotional – to take risk and to help their advisers support them in making the best financial decisions to meet their objectives.
James Pereira-Stubbs, Chief Client Officer, Oxford Risk said: “The FCA has specifically stated that behavioural biases should be taken into account as part of Consumer Duty, so it is concerning that so many clients don’t agree their adviser has assessed the issue.
“Advisers need to document behavioural biases as part of their suitability systems and processes and crucially need to understand how to act upon them to ensure good customer outcomes as outlined in Consumer Duty rules. Our software provides a powerful tool to meet the spirit and the letter of Consumer Duty and to set up advisers and investors for more successful collaboration.”
Oxford Risk supports advisers and wealth managers in adapting to Consumer Duty and more details on its services are available at Met New FCA Consumer Duty Regulations (oxfordrisk.com)
Its behavioural tools analyse investors’ financial personalities and preferences as well as changes in their financial circumstances which, supplemented with other behavioural information and demographics, enables them to build the most comprehensive picture of client suitability.
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 investment solution for each investor needs to be anchored on stable and accurate measures of Risk Tolerance. Behavioural assessments then provide an 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.
