In a nutshell
1) Assessing suitability is a (behavioural) science – When the stakes are as high as someone's life savings, it's not the time for guesswork or pseudoscience.
2) Investor management and investment management are intertwined – Personal finance is behavioural finance. You can't divorce investments from their owners.
3) Humans and technology perform best when their roles are played together – Managing so many moving financial and emotional parts requires a blend of human and technological qualities.
4) Focusing on suitable client outcomes is compliant to the core – Meeting regulatory requirements should be a side-effect of a suitability process that seeks first not to tick boxes, but to understand what makes clients tick.
These are the core principles that define Oxford Risk's approach to suitability. These principles are united by applying academic insights to improve investor outcomes. They are about behavioural finance in real life.
Behavioural finance in real life isn't about a big list-of-biases infographic. It isn't even asking better questions. Better questions alone can as easily excuse productive application of the answers as it can ensure them. It also isn't about reactively throwing out the tools of the traditional-finance approach, executing a hypercorrective jump from nothing but number-crunching classical finance to nothing but hand-holding counselling.
It is about moving behavioural finance from the fringe to the core of decision-making systems. It's about blending the best of both worlds. It's about using 'decision prosthetics': tools that help guide humans towards a better, engaged, decision, not make it for them. It's about providing tools to make both advisers and clients more consistently the best versions of themselves. It's about making these tools as integral to the investment process as an artificial limb to its host: better built-in than bolted on.
Personal finance is behavioural finance. 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.
1) Assessing suitability is a (behavioural) science
Giving suitable advice is an art rooted in science. Investing and decision-making are both inherently emotional, but that doesn't mean investment decisions can't be improved by a scientific approach.
Not all claims for 'scientific' approaches are created equal. Data need to be reliable and relevant; tests need to be tested, and interpretations need to be accurate.
Risk-profiling is a complex, technical process; it's therefore primed for delegation. But how can you trust the expertise to which you delegate it?
Our expertise means we know how best to elicit client insights, based on a data-driven understanding of how people feel about risk, how this shapes their decisions, and how they behave in risky situations.
2) Investor management and investment management are intertwined
Investments and the humans that own them are both resources aiming towards the same end. They should be managed as a relationship. Suitability is subjective. Investments are risky or suitable for an investor.
By viewing suitability as a relationship between investor and investments, we move beyond a narrow view of what it means to own a good investment portfolio, to a wider view of what it means to be a good investor. Beyond a myopic, robotic, snapshot view of risk-adjusted returns, towards a more relevant one of anxiety-adjusted returns along an entire investment journey.
Our software provides a bridge between investment-risk analytics and the suitable risk for an investor to take. This helps personalise advice and service, to show which elements of an investor's situation should affect their choice of investments, and which should affect only how those investments are viewed. To move from unengaged, unmotivated acceptance, to engaged choice, and more meaningful and trustworthy client outcomes.
3) Humans and technology perform best when their roles are played together
Humans are good at some parts of the suitability process. Tech is good at others. They each have distinct, complementary, roles to play. Tech should be leveraged to help humans navigate complexity, not add another layer of it. As simple as possible, but no simpler; beware both the simplistic and the overengineered.
Well-designed digital platforms deliver information to clients that is automatically personalised, easy to use, and shaped by its users' behaviours. Tech can turn outputs of a creative process into algorithms and save human energy for appreciating the uncertainty inherent in their interpretation.
Systems that combine human and non-human elements can be greater than the sum of their parts. In complex environments that involve human values, ambiguity, and changing rules of the game, the human-machine hybrids tend to win out against the independently human or machine competition.
4) Focusing on suitable client outcomes is compliant to the core
Compliance isn't about ticking boxes, it's about understanding what makes clients tick. In assessing suitability, the message sent about what is being invested in is less important than the one the client receives.
While hoops to jump through are always obvious, the benefits of doing so are not. The regulations aim to increase a client's comfort and confidence with investing – to arm them with a greater understanding of what they are investing in, and why.
Comfort and confidence are emotional states, triggered by internal traits colliding with external circumstances. Managing them through a letter-of-the-law lens can lead to laws being followed at the expense of meeting the very outputs the laws are there to produce. Focus instead on the spirit – improving client engagement and understanding – and the letter will look after itself.