More than one-in-five (21%) retail investment clients believe that their advisers don’t understand their behavioural biases when making decisions, according to Oxford Risk.
Its study with investment clients of wealth managers was conducted ahead of the implementation of the Consumer Duty rules on 31 July. The regulation aims to increase consumer protection and promote fair practices in the financial services market requiring firms to act in good faith towards retail customers, avoid foreseeable harm, and enable and support customers to pursue their financial objectives.
Not understanding behavioural biases is now a key issue for advisers and wealth managers under the Consumer Duty rules, which require firms to understand the issue and how it affects investors.
The Financial Conduct Authority (FCA) rules say: “Firms must understand and take account of behavioural biases and the impact characteristics of vulnerability can have on consumer needs and decisions.”
Oxford Risk research with wealth managers shows they are concerned about the issue – over 73% believe emotional decision-making costs investors investment returns. Nearly two-thirds (63%) believe emotional decision-making costs the average investor over 100 basis points of investible wealth each year. Around 15% believe the cost is over 200 basis points on an annual basis.
However, only 75% of wealth managers questioned last year see one of their key roles as helping their clients manage their emotions when making investment decisions. Some 3% don’t believe this is part of their role, and 21% were neutral about whether it is or not.
James Pereira-Stubbs, chief client officer at Oxford Risk, said: “The FCA has specifically stated that behavioural biases should be taken into account as part of Consumer Duty, so it is concerning that so many clients don’t agree their adviser has assessed the issue.
“Advisers need to document behavioural biases as part of their suitability systems and processes and crucially need to understand how to act upon them to ensure good customer outcomes as outlined in Consumer Duty rules.
“Our software provides a powerful tool to meet the spirit and the letter of Consumer Duty and to set up advisers and investors for more successful collaboration.”