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Advisers risk failing investors on portfolio suitability, academics warn

Advisers risk failing investors on portfolio suitability, academics warn
 

Wealth advisers need to make better use of technology to determine investors’ environmental, social and governance preferences, academics at behavioural finance expert Oxford Risk have warned.

Oxford Risk said today (April 12) advisers risked failing investors on suitability grounds by not using technology appropriately to measure investors’ preferences.

This meant they risked being caught up in the ‘green rush’.

Greg Davies, head of behavioural finance at Oxford Risk, said as the ESG industry expands, so does recognition of its “darker elements”.

“There are signs of trouble ahead,” he said, “and it’s likely to be unsuspecting and unsatisfied investors left picking up the tab.”

Davies said investor demand for investments with “some sort of socially conscious edge” is obviously rising.

“But it is in asking: ‘what is it, exactly, that they want?’ that we start to see difficulties.”

Oxford Risk says poor ESG labelling on funds were leading to the term being as “meaningless as the word natural on a food label”, and the industry was failing to record investors’ individual preferences which are often complex and contradictory.

It warned that a focus on what can be measured risked products being developed not to help investors meet their goals, but to “game” the management system.

The firm urges advisers to anchor investment solutions on stable and accurate measures of risk tolerance. 

Oxford Risk believes advisers need to determine how much ESG the investor should have, and then how much the investor is prepared to balance greater impact against financial returns.

Advisers then need to select investments based on investor preferences including considering their relative focus on E vs. S vs. G.

“Behavioural profiling then provides an opportunity for investors to learn about their own attitudes, emotions, and biases, helping them prepare for the anxiety that is likely to arise,” the research business said.

“This should be used to help investors control their emotions, not define the suitable risk of the portfolio itself.”

Research from the Embark Investor Confidence Barometer last month showed that nearly half (42 per cent) of advisers stated they were either neutral or not confident in their ability to accurately measure clients' environmental, social and governance preferences.

Embark said the financial advice industry has work to do to truly understand clients’ ESG needs.

sally.hickey@ft.com