Understanding the decision-making of retail investors

Making appropriate financial decisions is challenging, and consequently, many people do so with the help of an independent financial advisor (IFA). There is much evidence that the choices retail investors make are frequently inappropriate, and yet these decisions are important and could have a profound effect on the financial resources they have available, particularly in retirement. The first step in the process of selecting appropriate investments is usually for the adviser to present the investor with an attitude-to-risk questionnaire (ATRQ) to gauge their willingness to take financial risks.

Alongside project partner Distribution Technology (now Dynamic Planner), research by Professors Chris Brooks, Carola Hillenbrand and Kevin Money developed a new type of ATRQ which is now widely used by IFAs in assisting their clients to select products that are appropriate for their risk appetites. The research has meant that IFAs are now equipped with a more robust tool than was previously available. This has helped them to avoid the risk of subsequent legal action by ensuring the suitability of the investment products that they propose to clients, thereby avoiding legal risk for the adviser and enabling them to embody regulatory compliance in their processes.

Between the introduction of the new questionnaire in February 2018, and the end of October 2020, it was completed nearly 200,000 times by clients working with over 2,000 IFAs; 65% of risk profiles carried out using Dynamic Planner's system, which is the leader in the UK, are now conducted using the new questionnaire. The ATRQ has been universally well-received by the advisers who have adopted it, and it provides a more accessible, better informed and more confident basis for decision-making by the consumer. Its usage is growing rapidly, with an average monthly completion of around 18,000 in the UK.

To provide an idea of the scale of importance of the process in terms of financial outcomes, Dynamic Planner estimates that over £3bn is invested in financial products after the client’s risk-tolerance level has been assessed using the Henley ATRQ.

The impact arose from an ESRC-funded project awarded to Professors Chris Brooks and Carola Hillenbrand (‘Understanding the decision-making of retail investors’, October 2016-September 2020, full economic cost £523,883, ES/P000657/1).