Behavioural finance experts Oxford Risk have won the Best Risk Profiling Solution Award at the Wealth Briefing Swiss Awards 2021 and are using this platform to urge Swiss wealth managers to review their, often inadequate, processes for helping clients make the best financial decisions in the face of complexity, uncertainty, and behavioural biases – challenges that have been dramatically heightened during the Coronavirus crisis.
They believe many wealth managers and financial advisers in Switzerland and around the world are poorly equipped to help clients deal with their emotions when it comes to investing.
Oxford Risk says retail investors make investment decisions based on their emotional comfort, and on an average year it estimates this typically costs them 3% in returns. However, given the circumstances surrounding the COVID-19 crisis and the increased levels of market volatility, it estimates the cost of this will be more.
For those clients of Swiss wealth managers who have increased their allocation to cash during the crisis, Oxford Risk estimates the cost of this ‘reluctance’ to invest is around 4% to 5% a year over the long-term. In addition, it estimates that the cost of the ‘Behaviour Gap’ – losses due to timing decisions caused by investing more money when times are good for stock markets and less when they are not – i.e. buy high and sell low – is on average around 1.5% to 2% a year over time.
Greg B Davies, PhD, Head of Behavioural Finance Oxford Risk said: “The suitability processes of many wealth management businesses are typically too human heavy, inefficient, and front-loaded to the beginning of the client relationship to keep up with rapidly changing client circumstances at scale during a crisis. Understanding of client financial personality is typically limited to risk profiling – often badly – and subjective human assessment. Very few wealth management propositions are using the sort of objective, science-based measures that are needed to provide a comprehensive picture of their clients. There is too much guesswork and not enough technology.”
Oxford Risk does not advocate removing humans from the process, but it says advisers need to be assisted by better diagnostic tools enabling more accurate assessment of a client’s personality and likely behavioural tendencies.
Marcus Quierin, PhD, CEO, Oxford Risk said: “Switzerland has one of the biggest and most respected wealth management sectors in the world and because of its strong reputation for political and economic stability, it is well-positioned to grow and attract more international money.
“We are delighted to win the Best Risk Profiling Solution Award, but we would like to use this as a platform to urge Swiss wealth managers and others around the world to review how they assess the investment needs of their clients and ensure this is reliable and flexible enough to adapt to their changing circumstances.”
Oxford Risk builds software to help wealth managers and other financial services companies assist their clients in making the best financial decisions in the face of complexity, uncertainty, and behavioural biases.