The tool provides a clear methodology for addressing key questions, such as ‘How much guaranteed income should be purchased?’ and ‘What level of risk should be taken with the remaining pot of invested assets?’

Head of behavioural finance at Oxford Risk, Dr Greg B Davies said: “A common strategy for advised clients entering retirement is to allocate part of their pension pot to provide a guaranteed income for life, while keeping the remaining portion invested to allow flexible withdrawals. This approach not only reduces sequencing risk but can also enhance the investor’s capacity for risk-taking with their remaining investible assets.

“However, financial advisers face a significant challenge: how to demonstrate and evidence that their recommendations on these two components – guaranteed income and the remaining portfolio – are both suitable independently and optimally aligned together.”

Just Group, who specialise in UK retirement products and services, is feeding live data into the new tool developed by Oxford Risk, providing accurate and up to date intelligence on health, mortality and product pricing – enabling advisers to get accurate insight from the Oxford Risk solution on the level of Secure Lifetime Income (SLI) to provide for their clients, taking into account the client’s personal circumstances.

Stuart Slegg, head of retail investment solutions at Just Group said: “We’re very pleased to continue our work with Oxford Risk to support advisers achieve better outcomes for their clients in-retirement. The challenges faced by clients in-retirement are different to those accumulating wealth, so it’s important advisers can evidence how the solution they recommend meets their clients’ individual objectives.

“There’s a growing body of evidence that shows how including a proportion of Secure Lifetime Income within a drawdown portfolio can enhance client outcomes. How much Secure Lifetime Income to purchase for a client and how to adjust the remaining investments in the portfolio is a question that Oxford Risk have been working hard to solve. Its unique methodology provides advisers with a solution to this important question.”

The tool is being introduced against the backdrop of Increasing regulatory scrutiny of retirement advice in the wake of last year’s thematic review (TR 24/1) whoich has thrown down a challenge to advisers grappling with how best to demonstrate and evidence suitability.

Oxford Risk had observed that many firms in the financial advice industry are struggling to meet the FCA’s stricter requirements, particularly in areas like information collection, suitability assessments, and disclosures.

The behavioural finance specialists cite the growing popularity of guaranteed income products as just one example of how retirement income planning is changing and consequently how advisers must adapt.

Annuity sales rose 39% to 82,000 individual contracts sold in 2023/24, the highest since before ‘pension freedom and choice’ reforms in 2015. The £6 billion invested in annuities was more than 49% higher than the previous year.

The integration, which will be released in Q3 2024, will reduce double-keying and re-keying for advisers, with improved engagement, increased assets under management, and enhanced regulatory compliance expected. By allowing the ability to move data between Oxford Risk’s suitability assessments and Voyant’s lifetime cashflow planning tools, advisers can provide clients with a more holistic view of their financial data.

“This collaboration will not only streamline the advisory process, but also enhance the quality of adviser advice with the addition of deep, personalized insights,” said Richard Anderson, director of Strategy at Voyant. “Partnering with Oxford Risk allows each platform to combine their own strengths.”

“The partnership between Oxford Risk and Voyant ties together two unique propositions, giving financial advisers and wealth managers a ‘best in breed’ solution,” added Oxford Risk’s chief client officer, James Pereira-Stubbs.

Were you to track regulatory changes over time, you would see a clear direction of travel. Aligning your suitability processes with this direction can transform meeting the rules from a burden to a competitive advantage.

You do this by shifting your focus from the letter of the laws – what they say: the isolated boxes to tick; to their spirit – why they exist: to ensure good client outcomes.

A focus on the boxes to be ticked rather than the reasons the boxes exist can lead to laws being technically followed at the expense of meeting the very outputs the laws are there to produce.

The spirit of financial advisory regulations is clear: to protect clients from bad investments, from unscrupulous salesmen, and even from the clients themselves. They aim to increase a client’s comfort and confidence with investing – to arm them with a greater understanding of what they’re investing in, and why.

The letter of the regulations says you must account for a client’s risk tolerance, knowledge and experience, and so on. But that’s not really what the regulations are after. Because it’s perfectly possible to ‘account’ for these in a counterproductive way.

See also: All I want for Easter is the findings of the FCA’s thematic review

For example, in its 2011 guidance, the Financial Conduct Authority (FCA) stated that they’d ‘reviewed 11 risk-profiling tools and were concerned to find that nine tools had weaknesses which could, in certain circumstances, lead to flawed outputs.’ And in its 2023 MiFID II guidance, the European Securities and Markets Authority (ESMA) spelled out: ‘In assessing a client’s knowledge and experience, a firm should also avoid using overly broad questions with a yes/no type of answer and or a very broad tick-the-box self-assessment approach.’

It pays to ask why these guidelines exist. Shouldn’t the rules themselves be enough, without requiring separate guidelines on how to follow them? The regulators would not have bothered releasing additional guidelines if the ways the risk tolerance and knowledge and experience boxes were typically ticked were good enough. The problem wasn’t what was being done, it was the way in which it was being done.

This is arguably even more apparent in the way Mifid II guidance and the Consumer Duty rules have incorporated the requirement to account for client behaviours. For example, the need not only to tell a client something but to take reasonable steps to make sure they have actually understood it.

We see something similar too with the new Sustainability Disclosure Requirements and their guidance to tackle greenwashing.

See also: Advisers have rich opportunity to treat investors more like humans, not robots

Problems of a checklist-focused approach to suitability

It is undoubtedly tempting to believe that methodologically extracting each requirement from the lines of legislation and ensuring they’re covered in some way will add up to a clean bill of regulatory health. However, this decontextualised line-by-line approach has some practical pitfalls:

1. It encourages ineffective upfront loading – Confirming the right level of investment risk for a client prior to investing is non-negotiable. But that right level is subject to dynamic change. Understanding of both the client and how they interact with their investments naturally grows over time. Outputs also decay. Of the main elements of suitability, only risk tolerance is broadly stable across time. Trying to get everything out of the way as soon as possible is effective for a checklist, but counterproductive for a client outcome.
2. It hinders client understanding – A client’s understanding of what they’re investing in (and why) is not helped by haste or volume, or by the lack of a clear link between information requested and its ultimate importance for them.
3. It leaves advisers playing catch-up – A focus on the letter of the law can leave advisers feeling like they’re playing a constant game of catch-up: tweaking processes, and bolting-on additional steps to meet each new requirement. However, reacting to regulatory changes is less efficient than anticipating them. A focus on the spirit of the laws should ensure that regulatory requirements are met as a side-effect of following processes designed for other purposes.

Future-proofing your suitability processes

It could be argued that all talk of ‘spirit’ is a bit unscientific, and no defence against a regulatory judge. This would be wrong. It is far more dangerous to rely on blind box-ticking with evidence only of the answer, not the process, or the reason, or what the question was, or why it was being asked.

This isn’t about abandoning the checklists in favour of assuming that if a client is comfortable then all is well. It is simply about where to angle your attention. To see that the best suitability processes focus less on acquiring client knowledge for the purposes of ticking boxes, and much more on how we use this knowledge in coherent suitability frameworks that reflect an understanding of what truly matters to investors.

Recent research by Oxford Risk shows that many advisers claim to understand their clients’ psychology well. Yet the same survey shows 70% of advisers are surprised by clients’ behaviours. This suggests they can enrich their understanding of investors’ personalities and behaviours, for the benefit of their clients, themselves, and their companies.

Other studies show these benefits could be huge.

The challenge with current processes

Many advice processes still treat clients like robots, trying to force them into “technically correct” solutions without understanding the behavioural barriers to optimal outcomes.

Most approaches assume advisers simply need to discuss clients’ financial circumstances and give them a risk tolerance questionnaire, which spits out the “perfect” asset allocation and portfolio solution.

But these “right solutions” can quickly go wrong if they ignore what each investor is comfortable with, and their ability to stay the course. Traditional approaches do not account for clients feeling so afraid of moving 100% into unfamiliar stocks and bonds that they put it off completely, nor the possibility of being diverted from the right path by fight-or-flight reflexes to short-term news stories.

Clients need to stay invested even through pandemics, wars, and market crashes. They also need to avoid the temptation to increase risk in their investment portfolios during soaring bull markets, or to follow ill-judged advice from social media, news, friends or family.

This requires an understanding of financial personality well beyond a simple risk tolerance questionnaire. Often investors need to reach the “right answer” via a series of more comfortable steps, and a behavioural guidance system can keep them on track.

The role of personality

Studies show the cost of behavioural errors is between 3% and 4% a year. The biggest part of this comes from missing long-term investment returns by staying in cash simply because it feels safe, which typically costs 4% to 5% a year on the uninvested cash. If 50% of assets are in cash, which is common, that equates to 2% to 2.5% overall in missed returns.

The remaining errors come from emotionally-led decisions people make once invested and throughout their financial journey, which typically cost people a further 1% to 1.5% per year on invested cash.

Being underinvested could happen for many behavioural reasons, such as anxiety about market conditions, lack of confidence making financial decisions, or fear of repeating past mistakes.

See also: Revealed: All the winners of the IA Best Practice Adviser Awards

Biased investment decisions can also arise from a range of personality-linked behaviours, such as wanting to invest in familiar assets, chase past performance, or prioritise income over returns.

Investors also tend to follow comfortable narratives such as “I got it right last time, I know what I’m doing”, or “my brother knows about finance, he told me to do this”. The common factor in all these behaviours is that investors are acting in ways that make them comfortable in the moment, but at the cost of long-term returns.

When you study the emotions investors can go through over the investment journey, you can see how feelings dominate the process – from reluctance to optimism, excitement, denial, fear, insecurity, panic, and even apathy.

Treating clients more like humans involves recognising how personality traits play into this rollercoaster to help intervene at the right moments. It helps advisers identify what emotions are pulling an investor off course and how to remedy that. Then it helps move them towards the right path contextually in a way that maintains emotional comfort and likely leads to much better financial outcomes over time.

Behavioural finance isn’t just about telling clients what the right portfolio is, but speaking to them in a way that, given your knowledge of their personality, lowers their behavioural barriers to it.

How to be more human-centred

This more humanised journey could involve a vast number of different approaches. For some, it may begin with drip feeding into the market; for others, it might mean starting with some home bias; or it might involve sustainable investing.

Classical finance tells us drip feeding is technically inefficient. But if the alternative is doing nothing, it’s a good way to start and add emotional comfort for someone who fears investing.

Investing 100% into home country assets might reduce diversification, but if it helps persuade a client to move out of cash, that’s a good first step. You can build international diversification later.

Allaying ethical concerns with a sustainable/ESG approach can also break down barriers to investment.

It’s critical to understand what these different comfortable steps will be for each person you advise. In Anna Karenina, Tolstoy wrote, “all happy families are alike; each unhappy family is unhappy in its own way.” Humans are unique in their individual flaws and inefficiencies. Though the right answer is the same for most people, the emotional barriers they need to overcome to get there are different.

Greg B Davies, PhD, is head of Behavioural Finance, Oxford Risk

What is more, as James Pereira-Stubbs, chief client officer at Oxford Risk, asserts, this is not “a question for another day”. “The intergenerational transfer of wealth in the Middle East is happening now and we expect it to continue for the next 10 years or so,” he continues. “As you would expect, the younger generation is taking over the entire management of the family finances either because the older generation has retired or passed away.

“More and more commonly, however, we are seeing the older generation bringing their children into the relationship with their wealth manager or financial institution as a sort of apprenticeship, leading up to the complete transfer of responsibility. It is important that wealth managers recognise this trend and engage the next generation appropriately.”

One example of how this transition is manifesting is in a growing focus on impact investing and environmental, social and governance (ESG) considerations – as highlighted by Ocorian in its Family offices and the role of third-party service providers report, which resulted from canvassing more than 130 family office professionals responsible for some $62bn of assets under management, including 30 respondents based in the Middle East.

‘Exciting trends, new challenges’

“Younger family members are starting to take a different approach to parents and grandparents, with the switch to ESG investing the biggest change, along with a desire for family businesses to become advocates of ESG and sustainability in general,” says Lynda O’Mahoney, global head of business development – private client at the trust, administration and fiduciary services provider. “These new trends are very exciting but can also bring new challenges, such as ensuring investments are achieving target returns as well as the desired ESG credentials.”

According to Pereira-Stubbs, Middle East investors tend to be most interested in the environment aspect of ESG, with social elements second and the least amount of interest reserved for governance considerations. “To take this a level deeper we do not see a real differentiation in the United Nations’ sustainable development goals [SDGs],” he continues.

“Investors tend not to have a clear preference for any one SDG – rather individual investors express a variety of interests across all the SDGs. This makes the job of wealth managers and financial institutions more complicated as they need a robust assessment of what their investors care about, alongside the ability to match an investor to the right products within their portfolio.”

Domestic structuring

Another shift identified by Ocorian is a significant rise in the use of foundations for domestic structuring. Traditionally, family offices and high-net-worth individuals in the Middle East holding assets overseas have not structured these domestically but that is now changing, the firm argues, with more than 1,600 foundations set up in the UAE alone.

“The DIFC, ADGM and RAK ICC foundations regime allows for the transfer of the ownership of assets from ‘own name’, enabling the flow of wealth across generations and the continuity of family businesses,” says O’Mahoney. “This increase in domestic structuring highlights a growing awareness around the need for asset protection and financial security, as well as heightened sophistication around the governance of family offices.”

Overall, wealth managers are noticing important differences in the way younger generations wish to be served. Key among these include the idea that a digital offering is less a luxury than a necessity – with younger clients expecting to enjoy 24/7 access to their wealth management platform – and a greater focus on holistic wealth management.

“The parents have taught their children well, with the younger generation exposed to greater financial education opportunities,” says Pereira-Stubbs. “For wealth managers, this requires a much more robust portfolio construction covering all asset classes and a much better understanding of what the investors want, with more robust assessment tools.

“There is also more scepticism of active management and interest in private asset classes and, in general, the younger generation wants a greater alignment between their values and their investments. This places two requirements onto wealth managers – they need to really understand what their investors care about and they need to build out their product shelves to provide a much more robust ESG offering.”