Behavioural finance experts Oxford Risk have just released a new study which assesses the tools or software wealth managers use to judge the suitable risk level of clients.

Only one in four (25 per cent) European wealth managers would strongly recommend the tools or software they use to assess the suitable risk level of clients, a disturbing finding from a new study from behavioural finance experts Oxford Risk. 

The study was carried out in July 2023 by independent research company PureProfile who interviewed 210 wealth managers in France, Germany, the Netherlands, Spain, Italy, Switzerland and the Nordics. It found that 15 per cent of wealth managers were unsure about recommending the tools and software they use, while 4 per cent would actively warn others against using them to assess the suitable risk level of clients.

This reveals a potentially large disconnect between all the excitement surrounding the digitalisation of wealth management and the enthusiasm of advisors for the tools they have.

According to the research by Oxford Risk, which builds behavioural risk suitability software to help wealth managers support clients, less than one in three wealth managers strongly agree that they have access to the right tools or software to assess an investor’s suitable risk level effectively. More than one in 10 are not sure whether they do or not, and 3 per cent disagree, saying that they do not have access to the right tools or software to effectively assess an investor’s suitable risk level.

The study with wealth managers, whose firms collectively manage assets of around €4 trillion ($4.2 trillion), shows what impact this can have, with too many not having a clear understanding of their clients’ needs, preferences and biases once they have completed the suitability process.

Upon completing the suitability process with a new client, less than a quarter of wealth managers (24 per cent) strongly agree that they are clear on the portfolio allocation for that client, the report shows.

Just over a quarter strongly agree that they have a clear understanding of their client’s behavioural biases and less than a third (30 per cent) strongly agree that they have a clear understanding of their client’s knowledge and experience after completing the suitability process.

Despite so many wealth managers finishing the suitability process without strong outcomes and insights, just over half review their clients’ suitability assessments every year, the firm continued. Around a third say they review this every two years, and 8 per cent only review this between two and five years. One per cent of wealth advisors say that they only review clients’ suitability assessment every five years or more.

“Building up an accurate picture of clients’ suitable risk level is one of the most important aspects of a wealth manager’s role, as it sets the investing strategy and informs almost every other decision from then on,” James Pereira-Stubbs, chief client officer, Oxford Risk said. 

“Our study reveals a concerning picture of European wealth managers not having the right tools and services at their disposal to have a clear understanding of their clients’ behavioural biases or how to allocate their portfolio in the right way. Given the advances in technology and high-quality tools and tests that are available to firms now, wealth managers should only be using software that delivers the very best service and insight to them and their clients,” he continued.

Oxford Risk’s software supports wealth managers to help their clients to make 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, help 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 thinks 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 to 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.