Insight: Empowering Investors

The International Organization of Securities Commissions (IOSCO)

sees the potential for the broader use of innovative financial technology solutions to improve outcomes for investors “by expanding choice and lowering prices, fees and commissions, reducing transaction costs, improving transparency in products and markets, and increasing financial inclusion”.

Through TestLab 2022, the OSC Innovation Office explored the potential for RegTech solutions to empower and educate investors by equipping them with tools to assess their risk tolerance and capacity, as well as by making portfolio and investment product information available in a user-friendly format.

Vantage Point: TestLab 2022 Highlights

RegTech can make Risk Assessments more Engaging for Investors

Through TestLab 2022, we heard that investors may lack a clear understanding of their own risk tolerance and capacity, and struggle to conceptualize the potential future impacts of taking on riskier positions.

As a result, when these risks materialize, investors may react emotionally, potentially disrupting their investment strategy. By promoting the use of interactive solutions that encourage investors to actively assess their own risk appetite, both investors and advisors may achieve better alignment. This approach can also provide advisors with a more holistic and accurate understanding of their clients’ risk capacity and tolerance, leading to improved suitability determinations and personalized investment recommendations.

Some test participants trialed risk profiling techniques that incorporated behavioural science, psychometrics, and other questionnaire methodologies. Each of these methods offer a unique approach to looking at aspects of the attitudes, biases, goals, and financial capacity that impact a client’s risk profile.

Testing showed that using these tools to assist in risk profiling can support advisors, through:

Improving an advisor’s risk assessment workflow by covering topics they may not have otherwise addressed.

Creating a common foundation for the advisor and their client during a comprehensive risk assessment.

Encouraging more in-depth conversations with clients to enhance an advisor’s overall understanding of their risk tolerance and capacity.

Creating visualizations that make it easier to understand a client’s risk tolerance and recommend a suitable portfolio.

Providing shareable risk profile results that can support discussions with clients about portfolio recommendations.

Testing also reaffirmed the importance of involving clients in the risk profiling assessment as a key step towards developing appropriate and suitable portfolios. In a few cases where a client’s risk results did not fully match their self-perception, the discrepancy provided an opportunity for advisors and clients to discuss the results as part of a comprehensive risk assessment for the client.

Separately, at least one test participant sees an opportunity for self-directed investors to conduct risk profile self-assessments. It was estimated by FAIR Canada in December 2022 that 20% of investors do not use an advisor, and those investors may not have a good sense of their own perceptions of and tolerance for risk when managing their portfolio. Gaining a better understanding of their own financial perspectives and investment approach could help self-directed investors better align their investments with their financial objectives, time horizon, and risk appetite.

RegTech can Support Investor Knowledge and Decision-making

Stakeholders have shared with us that there is room to improve client investment knowledge through enhancements and supports for investors and their advisors.

A recent OSC Investor Office report found that while Canadian investors are among the most financially literate in the world, knowledge gaps still persist. The report found that investors correctly answered only half of the investment and financial literacy questions, while approximately 30% of them overestimated their financial knowledge. An even wider knowledge gap was noted in the December 2022 FAIR Canada Investor Survey, which found that 13% of investors “reported not knowing what types of investments they currently held,” suggesting that those investors lack basic knowledge of their own portfolios.

Some test participants developed their RegTech solutions to support advisors in presenting their clients with clear and effective information on investment recommendations, portfolio changes, or securities and product comparisons. When clients are better informed about their portfolios and investment options, they have better discussions with their advisors and can make better investment decisions that are reflective of their risk tolerances and preferences.

During TestLab 2022, we saw that RegTech solutions can support investors by providing them with product and market information in a clear and comprehensible way to support their financial decision-making. The most used features of a KYP solution for investors illustrated investment product information like performance, risk, cost, income or ESG ratings, as well as securities comparison tools. Advisors expressed that investment reports designed for retail investors could complement their onboarding and suitability review processes, as these reports highlight essential product information in a clear and easy-to-understand format. Additionally, advisors found data visualizations and customizable reports to be useful tools for sharing information with clients to help them build their investment knowledge.

We also learned that some RegTech solutions are available directly to investors. For instance, two test participants offer an investment and portfolio management solution to self-directed investors. Given recent trends towards self-directed investing in younger demographics, providing access and education for self-directed investors could help reduce knowledge gaps and support more informed investment decisions.

Vantage Point: Innovator Perspectives

We heard from test participants about how they see their RegTech solutions impacting the investor experience.

One test participant commented that a mutually beneficial and meaningful client-advisor relationship relies on redefining engagement between the two and aligning their interests. Ideal solutions are those that empower investors to understand their own behaviour and decision-making processes and enable advisors to adopt a client-focused mindset. In their view, by promoting client engagement through the solution, the advisors can better attract and retain clients.

Another test participant is focused on shifting investor attitudes around impact (ESG) investing by building solutions that help advisors discover, record, and respond to their clients’ sustainable investing preferences. The participant considers this approach to be a potential “game changer” as it allows advisors to build sustainable investing preferences directly into the client onboarding and suitability process. From their perspective, empowering investors to share their ESG preferences with their advisor can encourage better conversations with clients in an area of investing that is taking on greater importance for investors.