A tool developed by researchers at the University of Reading’s Henley Business School is transforming investment outcomes, by employing psychological principles to enable independent financial advisors to assess their clients’ attitudes to risk more accurately.

In recent years, a new generation of non-professional or ‘retail’ investors are engaging with the financial sector, many of whom are saving towards their retirement due to increasing life expectancy. Financial choices are hard for these investors because of the proliferation and complexity of products, and people often turn to  an independent financial advisor (IFA) for help with decisions.

For an IFA, knowing how much risk a client is willing to tolerate is crucial. Suggesting a high-risk, high-return product to a cautious investor who subsequently loses money can have disastrous consequences, while erring on the side of caution for an investor with more ambitious financial goals (and higher risk tolerance) makes little business sense.

Recognising the complexity of decision-making processes around financial investment, researchers from Henley Business School used psychometric theory to develop a new attitude-to-risk questionnaire (ATRQ) that provides a more robust assessment of consumer risk appetite.

The Reading ATRQ is the result of a collaboration between finance academic Professor Chris Brooks and chartered psychologists Professor Carola Hillenbrand and Professor Kevin Money. Unlike other such tools available to IFAs, it considers emotional dimensions of attitude to risk as well as cognitive and behavioural aspects.

By facilitating client engagement and ensuring regulatory compliance with FCA guidelines, the questionnaire helps investors while giving IFAs more confidence and reducing their concerns over future liability. Since its launch in February 2018, the questionnaire has been used by almost 200,000 retail investors when meeting with over 2,000 financial advisers, and it currently constitutes around 20% of all such questionnaires completed in the UK.

Find out more
View the full impact case study on the REF 2021 website: Improving Decision-Making for Retail Investors Through Risk-Profiling