Advisers need to change how they handle client investment suitability assessments in the age of Consumer Duty, according to behavioural finance experts at Oxford Risk.
Under current regulatory pressures, advisers need to move away from a product-specific focus towards using a fuller picture of individual clients needs and preferences, the fintech firm said.
The FCA’s Consumer Duty rules have continued to follow a common trajectory which puts the focus on the robustness of client investment suitability processes.
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While welcoming Consumer Duty, Oxford Risk is concerned that advisers and wealth managers could be “on dangerous ground” if they take a tick-box approach instead of “embracing the spirit” of the FCA’s new rules.
In response, the firm has launched a new guide to handling these issues titled More Than Mere Measurement: Guide to Client Investment Suitability.
The guide explains that individual measures of risk tolerance, risk capacity, behavioural capacity, knowledge, experience and sustainability preferences need to be combined into a holistic suitable risk level.
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Oxford Risk noted that measuring each component in isolation risks missing the overall intention to produce better outcomes for investors.
Dr Greg Davies, head of behavioural finance at Oxford Risk, said: “Investments are owned by investors, not robots. Assessing who that investor is, what those investments are, and how one is suitable for the other before and during an investment journey, is a scientific study of investor behaviour.
“Assessments should help advisers understand both a client’s financial personality and their financial circumstances. Crucially, individual assessments need to fit together within a robust methodology for determining the suitable level of risk for an investor to take right now. A random selection of instruments can’t claim to be an orchestra.”
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