Investor risk profiling at best sparks a long investment journey.  A refined mapping of investor preferences is crucial to take a conscious investment decision today and stick to the plan any time in the future.  With financial services, including investments, being offered more and more digitally, investor risk profiling should be presented in a way that appeals and performs without human encouragement.

There is a lot of potential for improvement in the context of investor risk profiling.  For one, digitisation enables to take risk profiling beyond the uniform hard copy questionnaire most of us use. However, broadening your view when it comes to risk categories is the real key to boost investor engagement.

To explain what I mean, let me refer to the title of a famous book written by Nobel laureate Daniel Kahneman.  Daniel Kahneman won the Nobel prize in 2002 for his pioneering work in decision science and behavioural finance.

The title of his book is “thinking, fast and slow”, which indicates two ways to come up with a decision in your mind.

Consider first “thinking fast”.  Thinking fast refers to instinctive thinking, based on a first reaction, based on emotions.  In the context of investing, thinking fast defines how your clients deal with fluctuations in their portfolio value and how they cope with interim gains and losses.  People differ in this respect.

As a financial institution you want to know how your client feels about gains and losses because you need to address this properly if you want to keep the client on board.  So, when it comes to “thinking fast” you basically want to prevent your client from pushing the “sell” button when financial markets are challenging.

Next consider “thinking slow”.  Thinking slow refers to situations where you take the time to think the situation through, to consider all options and to analyse the decision carefully.  In the context of investing, thinking slow defines how clients look at their long term investment goals.

Any investor knows that higher performance ambitions come with more uncertainty.  Again, people differ in how they balance long term risk and reward.  It is crucial that you, as a financial institution, find the right balance because this is what triggers your client to push the “buy” button today.

The book title points at the fact that “thinking fast” and “thinking slow” are complementary aspects of investor preferences. You hence need to address both, because they both bring valuable information.  “Thinking slow” tells you how to turn the client into an investor today. “Thinking fast” shows you how to make sure the investor stays invested tomorrow and any time in the future.

At the recent webinar organised by Objectway and everyoneINVESTED about hyper-personalisation and investor risk profiling, we talked about this and much more.

In summary, an investor risk profiling procedure that improves onboarding both in a physical and digital context crucially builds on behavioural finance findings.  By the way, this additionally makes your profiling future-proof also from a regulatory point of view (see ESMA35-43-748 Consultation Paper on improving the suitability assessment).