Perception A: Dutch wealth managers fail to address sustainability preferences and assess risk levels

7 december 2023

A new study from behavioural finance experts, Oxford Risk, shows Dutch wealth managers need to do more to incorporate clients’ sustainability preferences and many are relying too heavily on their own intuition and clients’ assessment of their suitable risk level.

Oxford Risk’s study with wealth managers across the Netherlands responsible for €395 billion assets under management found that despite client sustainability preferences being integrated into MiFID II requirements a year ago, just 13% ‘strongly agree’ their firm has successfully incorporated a method of establishing this into their processes. Around 7% aren’t sure whether they have managed to do this or not.

A third (33%) say they are fully aware of and strongly understand the European Securities and Markets Authority (ESMA) MiFID directives on sustainability (ESG) assessments. The research found 27% ‘strongly agree’ that they have access to the right tools or software in order to assess an investor’s sustainable (ESG) preferences effectively. Around 7% aren’t sure.

Despite 87% of Dutch wealth managers agreeing that establishing sustainability preferences is one of the most important tasks when onboarding a new client, only 27% say they are very confident in identifying the portion of a client’s investments that should be allocated to ESG investing.

Nearly a third (30%) say they are very confident in being able to identify how much of a portfolio should be allocated to Article 8 and Article 9 funds but around one in ten (10%) don't know whether they’d be able to do this using their current process.

Wealth managers rely on intuition and client self-assessment to set risk levels The study found that when assessing clients’ risk levels, 90% of Dutch wealth managers admit they largely rely on clients to tell them what their suitable risk level is. Nearly a third (27%) say they strongly agree that they rely largely on client self-assessment when it comes to setting risk levels.

The Dutch advisers are often also basing decisions on their own intuition. More than eight out of 10 (83%) say they rely on intuition to assess an investor’s suitable risk level, the research by Oxford Risk, which builds behavioural risk suitability software to help wealth managers support clients, found.

Nearly two out of five (37%) strongly agree that they have access to the right tools or software to effectively assess an investor’s suitable risk level and around 13% aren’t sure whether they do or not.

Similarly, upon completing the suitability process with a new client, more than a quarter of wealth managers in the Netherlands (27%) strongly agree that they are clear on the portfolio allocation for that client. Around 33% strongly agree that they have a clear understanding of their client’s behavioural biases and a third (33%) strongly agree that they have a clear understanding of their client’s knowledge and experience after completing the suitability process.

James Pereira-Stubbs, Chief Client Officer, Oxford Risk said:

'It’s concerning just how many Dutch wealth managers still haven’t got up to speed with MiFID II requirements, given it’s a year since they came into force. It appears some are hampered by a lack of the right tools and software to do this effectively and quickly, and we would urge the Netherlands wealth managers to find the right partner to help with this so that they can address client sustainability preferences properly by adopting best practices and a methodology that adheres to the MiFID II regulation.

Using Oxford Risk to determine the suitable risk and sustainability preferences of an investor, not only provides regulatory peace of mind but also engages investors positively to retain and grow assets under management.

Relying on investors to assess their own suitability and sustainability preferences is problematic, and dangerous. Many investors do not have clear answers to these questions, and many of the answers they do give are rooted in how the investor feels in that given moment and not how they will feel over the lifetime of their portfolio. Such subjective assessments are a very poor basis on which to build a long-term investment portfolio.

Based on market-leading behavioural research, Oxford Risk’s suitability and sustainability tools continue to evolve, providing solid scientific grounding to questions of how much sustainable investing is suitable, and how much assets should be weighted towards specifically environmental causes.

The company, which builds software to help wealth managers and other financial services companies assist their clients in making the best financial decisions in the face of complexity, uncertainty, and behavioural biases, has developed proprietary algorithms which rank products, communications, and interventions for their suitability for each client at a particular time.

It believes the best solution for each investor needs to be anchored on a holistic view combining stable and accurate measures of Risk Tolerance, an understanding of their overall financial circumstances, and knowledge and experience.

Behavioural assessments of financial personality then add the opportunity for investors to learn about their own attitudes, emotions, and biases, helping them prepare for any potential 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.'