I recently, via Embark Group, hosted a dinner and round table discussion on the topic of Suitability in a Digital World. The event was exclusively for leaders in the Fintech space, who shared their unique perspectives and ideas. Given the challenges of suitability and the popularity of our articles on this topic, below are several insights I gleaned from the discussion.

The event began with a short introduction from Be-IQ, the behavioural profiling specialists (if you don’t know about them or their proposition I encourage you to look at their website. I first heard of Be-IQ about a year ago and their name keeps cropping up in my conversations with advisers) to kick start the discussion. We then openly debated the issues and challenges of suitability, particularly in today’s digital world.

The challenges of suitability 

We are all too aware of the challenges of suitability and risk mapping (this article with Rory Percival remains one of our best read posts). The current method for determining suitability involves a self-assessment questionnaire, widely open to interpretation or influence from external factors at play for the client at that point in time, to generate a one dimensional score to map to a specific portfolio.

Unfortunately, and I’m sure you will agree, this method is flawed. It serves as a ‘tick box’ solution for the regulator instead of a tool for genuine, reliable insight that will protect clients from making decisions to the detriment of their future financial wellbeing.

Research has shown that behaviours such as confidence and loss aversion play a significant, but often unconscious role in risk-related decisions. To not account for these can inevitably lead to poor outcomes for both the client and adviser.

In a digital world the flaws of traditional one dimensional risk profiling are amplified. Without a human to support the process and gauge a client’s true perspectives and understanding of risk, adding a ‘whites of the eyes’ overlay, the resultant scores can be vastly different to the reality. That being said, adding a human to the process can introduce other biases. Is there a better way?

A new and different approach

The Be-IQ service was born from a conviction that there has to be a better way to protect people from poor financial decisions and that to do so, any new understanding must account for the irrationality that makes us human…our behaviours.

Be-IQ help advisers (digital wealth managers and human advisers) to better understand clients, their financial capability, and importantly, to demonstrate their understanding and acceptance of risk – crucial in our increasingly regulated market.

The Be-IQ approach accounts for behaviours such as confidence and loss aversion, along with capacity for loss and time. It then delivers a single Behavioural Risk score. This score can be easily mapped to investment solutions. Based on Be-IQ’s unique algorithm, it generates an output that is far more representative of a client’s true risk personality than traditional psychometric tests alone.

At the event a number of observations and insights were shared. Interestingly;

»   Be-IQ research shows that 38% of people measured as medium to high risk, are also hugely loss averse.

»   Studies show that advisers or services that counter a clients tendency for ‘behavioural self-harm’ can amount to a 1.5% improvement in investment returns (you may have heard us reference Vanguard’s definition of ‘adviser alpha’ before).

»   Short or long-term thinking has a huge impact on loss aversion. Very short-term thinkers tend to be incredibly loss averse. By contrast, short-term thinking clients tend to be rated medium to high risk on a traditional risk profiler.

»   Gamifiying how data is presented improves engagement and completion rates. The Be-IQ interface has a near 70% completion rate. It also gathers more information and insight, whist dramatically improving engagement.

»   Removing bias is crucial to getting a true steer on a client’s risk understanding and appetite. When surveys are undertaken with an adviser in-person, they are often subject to biases of the adviser, such as gender and age.


The key to successful investing 

The attendees agreed it is imperative to ensure clients know when to invest, save or simply do nothing. At Vanguard, if there is a wobble in the market the phones begin to ring. The conversations that ensue are quite different to what you would expect. The client will often say ‘I needed to call you, although I know what you are going to say. You will tell me to do nothing, right?’. These clients realise that Vanguard stops them from making silly decisions and helps them to stay on course.

At the end of the day, success comes through understanding how people ‘really’ behave when it comes to their finances. Using behaviours you can better understand the person, where they may need assistance, where a behaviour may result in financial self-harm and where they are able to manage things for themselves.

Humans though, will always be human. And there are times when no matter what you know about a person or their behaviours, life will get in the way. Gareth Johnson shared a story involving his wife’s uncle to illustrate this point (and I’m paraphrasing here, Gareth is far more eloquent!):

My wife’s uncle had been battling a compensation case and after several years the cheque came through for a sum of around £300k. The timing was terrible, just days after his wife died. No matter what risk profiling or behavioural analysis was undertaken prior to that date was irrelevant, when you find out what he did next: he tore the cheque into tiny pieces. The money meant nothing compared to the loss he was feeling.

In conclusion, today’s methods for determining suitability are not fit for purpose. We need multi-dimensional measures for risk that offer genuine, actionable insight. We can’t take away the human element, which adds another layer of complexity, but we can educate and evolve our processes to do a better a job – helping clients achieve better financial outcomes.