Wealth Managers Risk Failing Investors on ESG Suitability Technology: Report

Technology is too often a “blindfold” when it should be a “microscope,” Oxford Risk has warned. Wealth managers or advisers risk failing investors on suitability “by not using technology appropriately to measure ESG preferences and being caught up in the ‘green rush’,” according to behavioral finance experts Oxford Risk.

It argues that tech should be used “as a microscope to determine investors’ ESG preferences but too often is acting as a blindfold with the risk that investors are not being matched to the right investments for them.”

Oxford Risk is urging wealth advisers “to make better use of technology to provide improved services to clients based around understanding their needs through detailed profiling.”

Key problems it highlights “include poor ESG labelling on funds which are becoming as ‘meaningless as the word natural on a food label’ and failing to record investors’ individual preferences which are often complex and contradictory.”

It warns that “a focus on what can be measured risks products being developed not to help investors meet their social goals, but to game the measurement system.”

Oxford Risk’s research shows “most investors want the emotional comfort that ESG investments do what they claim to do and seek independent parties they can trust to verify those claims.”

The onus is on wealth advisers “to match suitable ESG solutions to individual preferences.”

However, properly constructed ESG profiling provides “a double bonus for wealth managers by increasing the amount investors put in ESG investments by up to four times and making investors with high ESG preferences much more likely to invest overall.”

Greg B Davies, PhD, Head of Behavioral Finance, Oxford Risk said:

“As the ESG industry expands, so does recognition of its darker elements. There are signs of trouble ahead. And it’s likely to be unsuspecting and unsatisfied investors left picking up the tab. 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 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.”

Oxford Risk’s behavioral tools “assess financial personality and preferences as well as changes in investors’ financial situations and, supplemented with other behavioral information and demographics, build a comprehensive profile.”

Oxford Risk’s financial personality tests can “measure up to 18 distinct dimensions, of which six reflect preferences for ESG investing.”

It believes the best investment solution for each investor needs “to be anchored on stable and accurate measures of risk tolerance.”

Behavioral 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.”

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

Founded in 2002 by leading decision science academics from Oxford University, Oxford Risk claim to be experts in behavioral finance and financial well-being.

They understand “how people perceive risk, make judgements about risk, and behave in risky situations.”

They claim to know “how best to elicit and convey information to ensure those perceptions, judgements, and behaviors reflect true intent.”

Oxford Risk applies behavioral finance expertise and technology “to help its clients deliver superior advice and service more efficiently.”

Benefits of behavioral finance-based solutions reportedly include:

Stronger Compliance

Produce more consistent and objective advice “with a robust digital audit trail and future proof regulatory requirements.”

Reduced Costs

Engaging digital delivery “streamlines human decision processes, improves efficiency, and focuses human effort where it is most valuable.”

Increased Revenue

Deeper client insight and engagement “increases satisfaction, ultimately driving share of wallet and word of mouth referrals.”

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