For long-term client relationships, suitability must be more than just a box-ticking exercise

Talking about emotions or personalities probably isn’t something your clients expect to do when they visit you for wealth advice. Yet investing is emotional – it’s about hope, and fear, just as much as it is about cold hard figures and in-depth planning.

You won’t find any mention of emotions or other behavioural factors in the FCA’s obligations on assessing suitability (COBS 9.2) – so it’s no wonder suitability assessments are so frequently relegated to the status of box-ticking compliance exercises.

Yet advisers who overlook the enduring value of deeper and more meaningful suitability assessments could be missing a trick – especially now that risk profiling tools like those of Oxford Risk have made it more efficient than ever before to build recommendations and advice anchored on stable, comprehensive, and accurate measures.

It’s very hard to nurture long-term client relationships without basing wealth advice on a deeper understanding of attitudes, emotions, and biases. There’s a reason why so much of the language around investments and wealth touches on such basic human emotions as hope, fear, panic, confidence and – of course – trust.

Applying accurate and efficient risk analysis tools, and (crucially) helping your clients understand the value of them, will empower you to help your clients prepare for the anxiety that is part and parcel of long-term investing. The impact – for wealth managers and their clients alike – cannot be overstated; reducing (among other things) the possibility of clients panicking, selling their portfolios; and exiting not only the market, but also the relationship you have built with them. Incoming regulatory changes (such as the new Consumer Duty) also mean that now is the time for wealth managers to revisit the way that suitability assessments are carried out.

Moving beyond the traditional box-ticking approach to suitability assessments to cover deeper factors (even including hope and fear) is an excellent opportunity to build longer-term client relationships.

After all, it’s the risk inherent in investing that gives it its power and profit. On the emotional side, it’s certainly true that some people find risk more exciting than others, but without that element of risk, your clients would simply keep all their wealth in a savings account (or under the mattress). It’s almost impossible to speak about risk tolerance without also talking about hope – after all, it’s hope that brings clients to your door (virtual or otherwise).

Deeper and more meaningful risk analysis is no longer the burden it once was – neither for you, nor your clients. Simply by leveraging deeper financial planning tools that encompass emotions, biases, and preferences, you can get to the core of your client’s suitable risk level more efficiently than ever before.

In addition, most clients are likely to actively enjoy a deeper behavioural profiling exercise. It’s a rare chance (especially for busy clients) to reflect on the things that matter most to them – on what drives them to invest (or save) – all while building the long-term investment strategy that will suit their objectives and financial situation well into the future. This natural interest in behavioural profiling will be particularly strong in Millennial clients. That a full 41 million people took Buzzfeed’s quiz, “Which state should you live in?” suggests that the appetite to learn about oneself is far from unusual.

Your expertise isn’t the only thing your clients come to you for. Even seasoned investors will opt for professional wealth management input for the steady hand you offer, and the satisfaction and peace of mind that comes with knowing that their investments are being taken care of. In that context it makes perfect sense to push the boundaries of suitability from box-ticking to an enduring and comprehensive financial planning exercise.

The regulatory environment (much like the market) is impossible to predict with any certainty, but we do know that the last few years have seen a growing tendency among legislators and government to protect consumers from poor financial decisions driven by emotions and other behavioural factors. In 2022, the FCA published a research note on behaviourally informed risk warnings for high-risk investments that specifically investigated the role of consumer uncertainty and fear in driving risk-based decisions. It wouldn’t come as a surprise if the FCA were to expand its suitability assessment obligations to encompass some of the behavioural risk capacity and analysis issues discussed above.

Spotlight on the new Consumer Duty

The new Consumer Duty is evidence enough of the FCA’s growing interest in behavioural science. Section 8.9 calls on firms to “put themselves in their customers’ shoes”, with the guidelines for implementation peppered with far more holistic language than we’ve seen in previous regulation. Indeed, there are no less than 13 references to customers’ “behavioural biases,” with eight of these including a prohibition against “exploiting” those same biases. “Vulnerability” is mentioned in the guidelines a full 166 times (that’s more than one mention per page) and is specifically couched in terms of the “characteristics of vulnerability,” implying a broad field of concern.

It’s worth bearing in mind the FCA’s own guidance on vulnerable customers describes vulnerability as “a spectrum of risk”, and cautions that “all customers are at risk of becoming vulnerable”, citing “low resilience to cope with financial and emotional shocks” as a characteristic of vulnerability. Wealth managers who might have relied upon the broad cautionary brushstrokes of the Principles (PRIN 2.1, COBS) could be in for a shock as the deadlines for implementing the new Consumer Duty approach.

In essence, the new Consumer Duty can be read as a ‘fleshing out’ of the Principles themselves, declaring – in greater clarity than ever before – the requirements for fulfilling the somewhat vaguer regulatory requirements of the past. The FCA betrays its own lack of confidence in firms’ readiness for the Duty; repeatedly stating that “a significant change in many firms’ culture” will be essential for fulfilling the “higher standards of the [Consumer] Duty and the shift to focusing on consumer outcomes.”

While such fundamental changes in regulatory focus needn’t cause panic, there is an urgent need for action. In fact, the lack of regulatory confidence in many firms’ readiness for the new Consumer Duty represents a powerful opportunity for those firms that make necessary changes early – and suitability assessments could be the best place to start. After all, it’s hard to imagine a better customer touchpoint than suitability to fulfil the new Consumer Duty’s elaboration of Principle 12, which requires firms to “act in a way that reflects how customers actually behave and transact in the real world.” Moving beyond box-ticking now will help make future compliance requirements less onerous on wealth managers and other finance professionals.

A truly suitable portfolio is one that takes as many dimensions as possible into account when assessing a client’s financial personality and circumstances. This means moving beyond the client’s financial capacity to ‘absorb’ losses, and taking a closer look at their behavioural ability to withstand the emotional impact of market and geopolitical volatility. The concept of vulnerability as “a spectrum of risk,” and the awareness that anyone can become vulnerable also need to be included. `While the behavioural ability to tolerate risk runs deep and is often hard-wired, eliciting the insights that really matter doesn’t need to be hard work - particularly with the financial personality profiling tools developed by leading decision science academics from Oxford University, at Oxford Risk.

Click here to find out more about how we can help you deliver suitability assessments more efficiently - and with greater impact - than ever before.