New research* from behavioural finance experts Oxford Risk shows wealth managers are braced for compensation claims from clients over failing to understand risk profiles and expect tougher regulation on the issue.
The study with wealth managers in New Zealand who collectively manage assets of around $145 billion, found 58% believe there will be pressure on them over the next five years to compensate clients for not doing enough to understand risk profiles.
Up to 80% expect action from regulators over the next five years to require them to better understand risk tolerance and suitability.
Oxford Risk believes many wealth managers and financial advisers need better systems and tools to support clients particularly, in light of recent events such as the financial impact of COVID-19, rising inflation and high levels of volatility.
Its research found nearly three-quarters (74%) of wealth managers in New Zealand are sometimes surprised by the investment decisions that clients make. The most common mistake identified by the research was evaluating returns over too short a time period (chose by 34%).
Other common errors included having a home bias in their portfolios (chosen by 32%), and making impulsive decisions to the detriment of long-term plans (also chosen by 32%).
Oxford Risk, which launched in New Zealand nearly two years ago, 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.
Bianca Kent, Head of Client and Strategy, New Zealand at Oxford Risk said: “Investment markets have been highly volatile in the last three years and many clients will inevitably be disappointed with their returns.
“It is worrying however that so many wealth managers fear they will face compensation claims over their advice and particularly worrying that it will focus on a poor understanding of client risk profiles.
“There is a widespread expectation from wealth managers that there will be tougher regulation on the issue and we would urge them to act now and get ahead of any changes in regulation.”
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 20 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.
* Independent research company PureProfile interviewed 50 wealth managers in New Zealand responsible for $144.5 billion assets under management during January 2023
About Oxford Risk
Founded in 2002 by leading decision science academics from Oxford University, Oxford Risk are experts in behavioural finance and financial well-being. They understand how people perceive risk, make judgements about risk, and behave in risky situations. They know how best to elicit and convey information to ensure those perceptions, judgements, and behaviours reflect true intent.
Oxford Risk applies behavioural finance expertise and technology to help its clients deliver superior advice and service more efficiently.
Benefits of behavioural finance-based solutions:
Produce more consistent and objective advice with a robust digital audit trail and future proof regulatory requirements.
Engaging digital delivery streamlines human decision processes, improves efficiency, and focuses human effort where it is most valuable.
Deeper client insight and engagement increases satisfaction, ultimately driving share of wallet and word of mouth referrals.