European advisers and wealth managers are still struggling to ensure investor suitability processes comply with Mifid II regulations, behavioural finance experts Oxford Risk warns.
It has issued its warning following additional guidance by European regulator European Securities and Markets Authority (Esma) highlighting a need for improvements in how the legislation is currently being applied to investor suitability assessments, with a focus on what firms are overlooking.
Oxford Risk said it is seeing “a lot of confusion” from advisory firms and, in some cases, major firms are “asking clients to sign off their own risk level even though the legislation specifically prohibits this”.
Esma’s latest guidelines on certain aspects of the Mifid II suitability requirements published in April highlight how the requirements to account for investors’ sustainability preferences are the most inconsistently applied, Oxford Risk says.
Other common mistakes Oxford Risk sees include confusing risk tolerance with the right level of risk for investors, and not combining risk capacity and risk tolerance in determining overall suitability.
Advisers and wealth managers also often incorrectly measure objectives and time horizons in relation to an investment and not the investor.
In addition, advisers and wealth managers often don’t measure investor preferences in a robust and scientific way, while confusing owning or not owning investments with having knowledge and experience relevant to the investing experience.
Oxford Risk is concerned that firms are not assessing suitability preferences in sufficient depth and emphasises the need to assess preferences more granularly than simple yes or no questions.
James Pereira-Stubbs, chief client officer for Oxford Risk, said: “The list of Mifid II requirements may be long, but the key to understanding the solutions is simple: it’s all about client insights. Better insights into a client’s financial, psychological, and emotional situation; better evidencing of these insights; and better presentation to clients of how these insights match up with suitable investments for them.
“Get this right and you not only meet the spirit as well as the letter of the law, but also have more engaged clients, better asset growth and higher retention.
“Stepping back to consider how these requirements can be best met in the context of the legislation’s overall intent can pay enormous dividends for both advisers and their clients. Unfortunately, we see many banks resorting to a box check exercise leading to a lack of compliance and investors in the wrong solutions.”