Knowledge and experience is a guide to how well-equipped the investor is to understand the risks they are exposing themselves to. Oxford Risk’s knowledge and experience assessment fits in seamlessly with the Compass suite of products to prioritise the most relevant questions about investors' understanding of finance.
It is an indicator of what an investor knows about investing in general, as well as specific investment types (where applicable), and what they have invested in before.
Some assessments focus excessively on the investor’s history, rather than on the lessons taken from that history that equip investors to make better decisions. A simple timeline of events doesn’t sufficiently discriminate between how much an investor has been told and how much they’ve actually understood.
Perhaps the most powerful way of demonstrating an understanding of investment risks is to ask the investor to attest to their understanding of the fundamental realities of investing.
The Oxford Risk approach is based on three core principles of what knowledge and experience is:
A dynamic process: experience and education and the assessment of knowledge and experience should be constantly informing and refining one another. Whether or not investors want to learn, they will invariably react to the investment journey in ways that shape their future decisions.
Incremental: The assessment should be based on cascading levels, with investors who pass a higher level not needing to be tested at lower levels.
Supplemented by behavioural analysis: standard approaches do a particularly poor job of capturing investors' feelings about past experiences. How investors learn from experience and education will be affected by their behaviours (such as their confidence and decisiveness).
Knowledge and experience should be a sense check on the range of suitable investment options, rather than indicating specific investment types.
Investors’ knowledge and experience can also be used by advisers to tailor the way they communicate, creating a dynamic feedback loop that increases their clients' comfort with investing over time.
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