Risk profile mismatch exposes ‘blind spot’ in wealth management suitability

More than half (55 per cent) of investors have a higher ‘suitable risk level’ than their ‘attitude to risk’ alone would indicate, exposing a “critical blind spot” in wealth management suitability, according to Oxford Risk.

The behavioural finance fintech assessed 87,000 investors through its suitability tools, comparing each investor’s attitude to risk with their suitable risk level.

It found that, where suitability was assessed by only referencing attitude to risk or where risk capacity was not modelled systematically, many investors would be placed in portfolios that were too cautious for their financial circumstances.

Oxford Risk’s modelling indicated that putting investors at their modelled suitable risk level, which accounts for both upward and downward differences from their attitude to risk, produced an aggregate projected growth differential of 7.5 per cent over 10 years in an average market.

In a ‘very good’ market, the aggregate projected growth differential role to 17.6 per cent.

These figures compared modelled outcomes from investing clients' attitude to risk alone with investing them according to their suitable risk level.

The attitude to risk modelling aims to reflect an investor’s stable, long-term willingness to accept the possibility of lower long-term outcomes for a greater chance of higher long-term returns.

Meanwhile, suitable risk level modelling is the risk level appropriate for the investor’s investible assets once the full suitability picture is considered, including risk capacity, behavioural capacity, knowledge and experience, and relevant preferences.

Oxford Risk found that 55 per cent of investors had a higher suitable risk level than their attitude to risk alone would indicate, while 14 per cent had a lower suitable risk level.

The company said this mattered because the industry had traditionally focused on preventing investors from taking too much risk and, while that remained essential, investors could be left too conservatively positioned if their financial capacity to take risk was not properly captured and systemised.

It added that, for wealth managers and advisers, these figures represented a client outcome issue and a commercial issue, as systematic under-risking could become a significant drag on asset growth and the long-term value of advice across a client base of meaningful scale.

The findings highlighted a particular challenge in the mid-range attitude to risk bands, where investors with apparently similar attitudes to risk can have very different suitable risk levels, reflecting the complexity of factors that bear on suitability at these levels.

Oxford Risk argued that addressing this ‘blind spot’ required a more systematic approach to suitability that treats attitude to risk as a stable anchor, models risk capacity at the level of the investor’s total wealth and financial circumstances, and applies the same rigour to identifying when investors can appropriately take more risk as it does to identifying when they should take less.

“The industry has spent years making sure investors are not put into portfolios that are too risky for them,” commented Oxford Risk head of behavioural finance, Greg Davies. “That is right. But it is only half the suitability challenge.

“Our research shows that more than half of investors in this sample had a higher suitable risk level than their attitude to risk alone would indicate. This is not about encouraging reckless risk-taking. It is about recognising that attitude to risk is only one part of suitability.

“For many investors, especially those with strong risk capacity, their investible assets need to take more risk so that their overall wealth position is aligned with their underlying willingness to take risk.

“If firms only systemise the reasons to reduce risk, but not the reasons to take more, clients can be left too conservatively positioned. The cost compounds quietly over time.”

Oxford Risk chief client officer, James Pereira-Stubbs, added: “For wealth managers, this is not a niche modelling issue. It is a growth, client outcome, and Consumer Duty issue. Firms need to show that they are helping clients take the right level of risk, not simply avoiding excessive risk.

“At scale, small systematic errors in risk matching can compound into material foregone wealth for clients and lower AUM growth for firms. Better suitability is not a brake on growth. Done properly, it is one of the foundations of it.”

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