Too many wealth advisers view risk profiling as an “unnecessary box-ticking exercise” which is leading to poor client outcomes, according to research by Oxford Risk.

The behavioural finance expert suggested that risk profiling is essential to providing good advice and ensuring regulatory compliance, but warned the profiling field is rife with misunderstanding and poorly designed assessment tools.

Advisers confuse clients’ tolerance of long-term risks “far too often” with the unstable attitudes they display in response to short-term events, such as market corrections over time, the group stated.

Oxford Risk builds software to help wealth managers and other financial services companies assist their clients in making financial decisions in the face of complexity, uncertainty, and behavioural biases.

However, the group said that many wealth managers and financial advisers are “poorly equipped” to help clients deal with the emotional and psychological effects their clients have endured during the COVID-19 crisis, and the impact it has had on markets and their investments.

Oxford Risk head of behavioural finance, Greg Davies, commented: “By conflating long-term risk tolerance with short-term emotional risk attitudes, advisers will potentially replicate all the silly things that investors do already, rather than helping to control investors’ more destructive tendencies.

“This is exacerbated by the ill-advised trend of using ‘revealed preferences’ and gimmicky ‘games’ to determine risk tolerance. Such over-engineered and unstable approaches to measuring risk tolerance are inappropriate and do not reflect clients’ actual willingness to take long-term risk. Measuring the wrong thing is worse than not measuring at all.”

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