European wealth managers are relying too much on their own intuition and clients’ own self-assessment of their suitable risk level, according to a new study from behavioural finance experts, Oxford Risk.
Its study with wealth managers across France, Germany, Netherlands, Spain, Italy, Switzerland, and the Nordics found three out of four (75%) wealth managers admit they largely rely on clients to tell them what their suitable risk level is. Around one in five (22%) say they strongly agree that they rely largely on client self-assessment when it comes to setting risk levels.
Advisers are often also basing decisions on their own intuition. Around seven in ten (71%) wealth managers say they rely on intuition to assess an investor’s suitable risk level. Around a third (34%) strongly agree that they do this, the research by Oxford Risk, which builds behavioural risk suitability software to help wealth managers support clients, found.
Its revenue from clients in continental Europe has increased by 300% in the past 12 months with much of its growth driven by firms needing to find better solutions so that they can meet suitability guidelines from the European Securities and Markets Authority (ESMA).
Oxford Risk’s study with wealth managers whose firms collectively manage assets of around €4 trillion found the majority (91%) have a systematic method to combine the different elements that go into establishing a client’s suitable risk level.
However, when asked to rank the most important elements of assessing a client’s suitable risk level, only just over one in four (28%) rank an investor’s self-assessment as very important. Instead, almost half (47%) say that investors’ psychological willingness to take on risk is the most important factor, followed by an investor’s composure (40%) and an investor’s wealth and cashflow (40%). Just 6% say that age is important when assessing a client’s suitable risk level.
Table to show the most important elements when wealth managers assess a client’s suitable risk level
| Rank | Percentage of wealth managers who ranked element as ‘very important’ to assessing a client’s suitable risk level | Elements used to assess client’s suitable risk level |
| 1 | 47% | Investors’ psychological willingness to take on risk |
| 2 | 40% | Investors’ composure |
| 3 | 40% | Investor wealth and cashflow |
| 4 | 33% | Specific asset class experience |
| 5 | 32% | Overall investing history |
| 6 | 30% | Investors’ goals |
| 7 | 29% | Professional credentials |
| 8 | 28% | Investor’s self-assessment |
| 9 | 11% | Gender |
| 10 | 6% | Age |
James Pereira-Stubbs, Chief Client Officer, Oxford Risk said: “European wealth managers are being overly reliant on their own intuition and clients’ self-assessment when it comes to determining clients’ suitable risk level. This is despite them being aware that self-assessment isn’t the most important factor and instead, there are a large number of different aspects that need to be considered to accurately assess clients’ suitable risk level.
“If wealth managers do not have good tools, they tend to measure the wrong elements when making assessments which can mean companies fail to offer a consistent service to clients. Using Oxford Risk to determine the suitable risk level of an investor, not only provides regulatory peace of mind but also engages investors positively to grow and retain assets.”
Oxford Risk’s software supports wealth managers to assist their clients in making the best financial decisions in the face of complexity, uncertainty, and behavioural biases.
Its 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 20 distinct dimensions, of which six reflect preferences for sustainable investing.
Oxford Risk 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.
