Australian wealth managers expect customer backlash on risk profiling

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Research from behavioural finance experts Oxford Risk shows Aussie wealth managers are braced for compensation claims from clients over failing to understand risk suitability, and expect tougher regulation on the issue. The study with wealth managers, who collectively manage assets of about $232bn, found 58% believe there will be pressure on them over the next 5 years to compensate clients for not doing enough to understand client risk suitability.

What were the findings of Oxford Risk’s survey?

Over three-quarters (77%) 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 tools to support clients, particularly in light of events like the financial impact of COVID-19, rising inflation, and high levels of volatility.

Its research found more than two-thirds (68%) of survey respondents are sometimes surprised by the investment decisions that clients make. The most common mistakes identified by the study include evaluating returns over too short a period (chosen by 36%).

Other common errors uncovered by the survey included making impulsive decisions to the detriment of short-term plans (chosen by 35%) and buying high and selling low (chosen by 34%). Oxford Risk, which launched in Australia 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.

What were Oxford Risk’s thoughts on the survey?

Bianca Kent, Head of Client and Strategy, Australia at Oxford Risk said: “Investment markets have been highly volatile in the last three years and many clients will be disappointed with their returns. It is worrying that wealth managers fear they will face compensation claims over their advice, worrying that it will focus on a poor understanding of client risk profiles.”

“There is also 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.”

What is the market offering of Oxford Risk?

Oxford Risk’s behavioural tools assess financial personality and preferences and 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 solution for each investor needs to be anchored on 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 anxiety. This should be used to help investors control emotions, not define the suitable risk of the portfolio itself.