Shocker: Risk guidance from advisers varies on mood, hunger, marital status

New research finds assessments from different investment professionals were "closer to totally random than totally consistent".

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Financial advisers assess the risk of an investment differently depending on external "noise" like their own mood that day or how hungry they are.

That's according to the new report Under The Microscope: 'Noise' and Investment Advice, which technology firm Oxford Risk released this week.

Oxford's research gave different financial advisers the same product to assess for an imaginary client.

Worryingly, they gave "remarkably different judgements" on the risk. Moreover, asset allocation advice was "scattershot".

"Humans are wonderful at many things. But they are inefficient and unreliable decision makers, especially where many moving parts are involved – as in risk capacity," said the report author Dr Greg Davies.

"Humans are prone to 'noisy' errors – unduly influenced by irrelevant factors, such as their current mood, the time since their last meal, and the weather."

The report, in fact, found the financial advice provided was "closer to totally random than totally consistent".

Financial advisor on phone and looking at computer whilst eating and holding coffee.

Image source: Getty Images

Noises that influence investment advice

There were certain characteristics of advisers that correlated to the risk advice they gave. The report said these were the most influential:

  • Married advisers recommend slightly lower risk levels than advisers who are single
  • University-educated advisers have lower risk capacity assessments on average
  • Salaried advisers give higher recommended risk levels than those on commission or fee-based

"Advisers who are single tend to recommend more cash," read the report.

Remarkably, the number of years in the industry doesn't have a measurable impact.

"Interestingly, how experienced the adviser is, or how many clients they serve seems to make no significant difference to the advice delivered."

The research concluded the personality of the professional, understandably, also has an influence.

"Advisers who themselves are more tolerant to risk tend to pass it on to their clients."

Even in instances in the study when multiple advisers came up with the same risk judgment, they didn't agree on the asset allocations the client should have.

"Advisers who have higher composure do recommend significantly more equity for each risk level," the report stated.

"This makes a lot of sense as these advisers are likely to be much less anxious about short-term volatility and more focussed on long-term risk vs return."

Oxford Risk supplies software to financial advisers and institutional investors to help them override behavioural biases.

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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