Globally recognised expert in applied decision science, behavioural finance, and financial wellbeing, as well as a specialist in both the theory and practice of risk profiling. He started the banking world’s first behavioural finance team as Head of Behavioural-Quant Finance at Barclays, which he built and led for a decade from 2006.
WealthBriefing Group Editor, Tom Burroughes interviews Oxford Risk Head of Behavioural Finance, Greg Davies PhD around how wealth managers and advice firms can assess investor suitability and sustainability.
Oxford Risk’s purpose is to help investors make the best decisions for their long-term financial wellbeing in the face of complexity and potentially unhelpful psychological tendencies. A good suitability process recognises that humans are more than a mechanical sum of their parts. Helping whole humans increase their financial wellbeing necessarily means accounting for a recipe of preferences that extends beyond simply how much investment risk they’re willing to take. Expanding our behavioural profiling to include attitudes to sustainable investing took an already market-leading innovation and enhanced it to cater for the rapidly growing market of investors keen to align investment goals with social values, and to support the providers of solutions aimed at these investors. We blend empathetic, value-conscious behavioural psychology with quantitative-finance theory, and harness the number-crunching power of tech, to benefit from the best of both human and algorithmic worlds.
Merging suitability with sustainability meets with general challenges of matching investors to suitable investments, and specific ones associated with helping investors understand how to accommodate ESG preferences within this. Scientifically robust investment advice is not as ubiquitous as you’d like to think. The need to assess an investor’s risk tolerance, for example, has been law for a long time, and academically at least, we’ve known how to do it well for just as long. However, the application of this knowledge to real-life – moving from ticking boxes to understanding what makes clients tick – is still dragging its feet. ESG suffers from a similarly short-sighted approach: a one-size-fits-all solution that’s largely ignorant of what a varied mix of individual investors is actually trying to achieve.
We currently have no competition of note in the sustainable-preferences space, though that doesn’t stop us continuing to innovate and improve our assessments, based on their ongoing use by thousands of investors, new research findings, and the evolution of ESG products.
There is a danger of being so caught up in the ESG ‘green rush’ that slick sales is prioritised over sound solutions.
For example, in the promotion of ESG in general: slapping an ESG badge on anything, making it hard for investors to distinguish between available options. Or in the precision of investor preferences: measuring and applying ‘preferences’ in a cursory way, overlooking the crucial nuances in complex recipes of preferences.
The trend points towards solutions that are increasingly personalised, and therefore better matched to investors’ behavioural patterns. The inherent difficulty here is the potential conflict with an industry that is focused much more on naming products as sustainable than it is in matching them to the sustainable practices investors want to see: something we hope to play a part in correcting. Regulatory pressure to ensure investors’ sustainability preferences are properly accounted for will no doubt increase.
We hope that prospective clients will become more aware that it is possible to deliver genuinely personalised ESG solutions at scale, using the appropriate blend of tech and behavioural expertise. I also hope it could help dispel a few myths, such as the one that claims all ESG-inclined investors are after the same thing – because they’re really not
You can find out more about MiFID regulation in our wealth manager’s guide, ESG: The Compelling & The Compliant.
For more information around meeting MiFID regulation or matching clients with suitable and sustainable investments, please email email@example.com.
As European MiFID II regulation comes into force and other global regulators start to follow suit, we review what wealth managers can do to meet regulatory compliance whilst best positioning themselves for client demand in ESG investments.Read More