Recommendations to clients can literally depend on which way the wind blows, a new study has found.
Customers are at risk of wrong investments because financial advisers vary wildly when judging risk, research shows.
A study of advisers found that the outcome of risk tolerance assessments even depended on their current mood, the weather or how hungry they were.
Behavioural finance experts Oxford Risk, who ran the study, said in one instance an adviser said a set imaginary client was very low risk, when another judged the client as very high risk.
For another, advisers were evenly split between recommending low, medium, or high levels of risk to a customer.
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Oxford Risk said advisers gave “remarkably different judgements” on how much investment risk was suitable for clients with the same hypothetical information, and asset allocations were “scattershot”.
Even in cases where advisers agreed on the suitable risk levels, they disagreed on what kind of portfolio to recommend to clients.
All in all, Oxford Risk said advisers’ recommendations “were closer to totally random than totally consistent”.
Education is also linked to how advisers judge risk differently.
Advisers with degrees were more likely to make lower risk assessments than those without.
Married advisers made more lower risk assessments than single ones, and those on salaries made higher risk recommendations than those on commission or fees.
The report is called ‘Under the Microscope: ‘Noise’ and investment advice’.
‘Noise’ means pointless factors that affect advice, such as an adviser’s hunger level.
Oxford Risk says the solution is to use technology to help advisers be more consistent when advising clients with risk tolerance and asset allocation.
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Greg Davies, head of behavioural finance at Oxford Risk, says: “Like the Decision Review System used in cricket or the Television Match Official in rugby, technology can be employed to greatly increase consistency and accuracy.
“But in the end when the margins are extremely tight it should be the umpire’s call. So should it be in the world of investment advice.”
The study was run with the help of the South African firm Momentum Investments and South Africa’s professional body The Financial Planning Institute.
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