5 things to look for when selecting risk suitability software

The partnership between a wealth management firm and its tech is crucial. The right software can support smooth-functioning and compliant advice, providing a robust framework within which the adviser’s art can flourish. The wrong software can be a clunky burden and a cause of administrative headaches.

Here are five questions to ask when deciding which tech is the best fit for you.

1. How robust is the methodology behind the assessment tools?

It’s relatively easy to throw together some Risk Tolerance questions. It’s more difficult to know that those questions are scientifically valid, reliable across different populations, and actually measure Risk Tolerance, rather than infecting the assessment with questions that merely look like they do.

It’s also relatively easy to tick all the regulatory boxes in some way: to consider willingness and ability to take investment risk, account for knowledge and experience, and so on. It’s much more difficult to do so in a way that combines them to deliver an overall suitability metric fit to be matched to available investment options. Suitability is applied to people, not pieces. The aim of the game is not to tick independent boxes, but to have a reliable system for measuring and combining interdependent aspects of an individual investor and their inevitably shifting circumstances.

2. Is the suitability solution comprehensive?

For a suitability solution to combine elements in this way, it needs to be comprehensive. This means it needs to account for all key aspects of an investor’s experience, and to do so throughout their investment journey.

Two major flaws in typical suitability approaches are ignoring (or paying scant attention to) investor behaviours, and front-loading assessments, thereafter trusting that the investor will act like the models predict they will.

In addition to their financial ability to take risk (their Risk Capacity) each investor has an emotional ability to take risk: a Behavioural Capacity that determines how best to interact with investments to ensure ongoing comfort with the risk being taken.

It doesn’t matter how good a plan is if the person it’s written for doesn’t stick to it, or feels anxious doing so. Indeed, the theoretically ‘perfect’ portfolio could be the very spark for some distinctly imperfect behaviours. Emotional ability is not about financial circumstances, but financial personality. A suitability solution that doesn’t account for financial personality is suitability for robots or zombies, not humans.

3. How well does it integrate with your back-office processes?

Integration involves both ease of installation and whether the suitability software is built-in, or bolted-on.

Workarounds for the various elements of a suitability process may be ubiquitous (e.g. using a cash-flow model to approximate Risk Capacity), but they should be unnecessary.

Central to many regulatory concerns isn’t a lack of good advice, but a lack of good evidence of the robust, reliable, repeatable process that led to that advice.

4. What support is available, both when onboarding a new system, and ongoing?

Inefficient and ineffective workarounds will extend to even comprehensive, well-integrated software if the support for that software is weak.

This is particularly evident at the outset: start to use something poorly and it gets increasingly difficult to make the most of it. However, good software will keep evolving, especially in a highly regulated environment, making trustworthy ongoing support equally important.

5. How well future-proofed is it?

Regulatory requirements rightly drive a large part of the design of suitability systems.

However, often the drivers are caught asleep at the wheel, and left constantly trying to catch up with the latest ‘burdensome’ tweak to the rules.

This happens when attention is focused on the letter of the law: the specific boxes to be ticked, rather than the spirit: the intention behind the boxes.

A future-proofed system recognises that meeting the spirit of the regulations will always meet the letter, but the reverse is not always true.

The spirit of the suitability regulations is to better understand clients, to better match them to investments suitable for them. Investor behaviours are an inescapable part of this. For behavioural assessments to be most effective, they need to be built into the suitability process, not bolted on as an afterthought, perhaps designed to match a given ‘bias’ to a standalone solution, rather than treating the patient as a complex, human, whole.

The best suitability software will have a history of continual refinement, often meeting the next regulatory requirement long before it becomes necessary to do so. For example, Oxford Risk upgraded our Financial Personality Assessment to include sustainability preferences many years before the latest MiFID regulations added specific references to do so, thus negating the requirement to upgrade or change suitability provider. Click here to find out more about Oxford Risk’s Investor Compass Risk Suitability solution or download our Digital and Hybrid Advice Transformation Guide to learn more about Risk Suitability software solutions.