In this post:

  • The Sustainability Preferences Scramble is On!
  • Root Causing the Profiling Gap
  • Root Causing the Suitability Gap
  • For the Love of Clients, Not Another Questionnaire

EU Wealth Managers are Behind on Sustainable Preferences: Questionnaires are a Poor Band-Aid

The Sustainability Preferences Scramble is On!

The 2º Investing Initiative just released alarming stats [i] about EU wealth managers’ preparedness for asking clients about their sustainability preferences.

Here are the two data points that caught my attention, especially:

  • Only 25% of advisors ask about Environmental or Social objectives as part of client profile assessment. That ranges from 55% in Germany (not bad, but not great either) to a woeful 16% in France (ostensibly, an ESG leader)
  • 50% of clients are not offered suitable sustainable investing products or not convinced/didn’t understand suitability when offered to them.

Yikes.

We’re 3 months away from MiFID II Delegated Act on sustainability preferences going into effect. As of August 2, financial advisors will be required to collect their clients’ sustainability preferences and adhere to product suitability guidelines.

There ought to be a sense of urgency among advice leadership teams about this. It calls for rapid root causing and clear-eyed assessment of potential solutions.

Here’s my take on the root causes, based on conversations we’re having with advice leaders and our own investor research focusing on sustainable investing and advisory experiences.

Root Causing the Profiling Gap

Datapoint: Only 25% of advisors ask about E or S objectives as part of client profile assessment.

Three main root cause branches:

1) Advisors don’t feel comfortable with their knowledge of sustainable investing

ESG is a relatively new, very large and quite complex domain. So, it’s natural advisors aren’t proactive about discussing sustainability preferences with their clients. Above all, advisors want to be seen as knowledgeable and want to have confidence as they engage clients.

From our own studies of the sustainable investing experience, we know that only 31% of investors in the UK, for example, say their advisor is effective at explaining ESG concepts and terms to them. [ii]

2) Advisors fear stepping on a values “land mine” with sustainability conversations

Some advisors are cautious about “values” conversations that a client could take the wrong way. While this is a bigger problem in the US, it’s still a lurking confidence sapper and barrier for EU-based advisors to initiate a sustainability conversation. [See: From Cautious to Confident: Advisors and ESG Conversations].

3) Wealth management firms have not implemented the tools and training to gather sustainability preferences consistently and at scale

This is a function of a few factors:

  • regulatory details are relatively recent, so there hasn’t been much time;
  • until recently, there haven’t been good technology solutions to enable this;
  • the industry mostly has come at ESG from a product-centric angle, and that’s caught them flat-footed on understanding the scope and nature of clients’ sustainable investing preferences and expectations of the sustainable investing experience

Root Causing the Suitability Gap

Datapoint: 50% of clients are not offered suitable products or not convinced/didn’t understand suitability when offered to them

Three main root cause branches for this one:

1) Firms lack the product range to meet the variety of sustainability preferences

We know from our own preference research that investors have highly individualized sustainability preferences. [See: The Social Currency of a Personalized ESG Investing Experience].

Anecdotally, as we work with wealth management firms on the preference-to-portfolio journey, we see product menus that are heavily skewed to “E” (with many funds redundant to one another) and ill-suited to meet the range of individual preferences across a client base.

2) Firms lack systems to match for suitability

This boils down to a hideous amount of system complexity. Each input needed for developing a suitability regime is itself complex—from the variability of client preferences to the voluminous product menus to the ESG ratings that “score” the products. Layer on top of that the added complexity of multiple client segments, multiple channels, and multiple geographies…[head explodes here]. It’s no wonder medium- to large-sized wealth management firms struggle to get their arms around the suitability hydra.

3) Advisors are unsure how to have the preferences-to-portfolio conversation

Even if the two root causes above were solved, advisors likely would still struggle with the client conversation that “shows the work” of mapping preferences to portfolio, and the ensuing give-and-take. Again, it comes back to the breadth of the ESG domain and reflects the systems complexity in point 2 above. Net result: client doesn’t feel the product recommendations they receive are suitable, or just doesn’t know.

For the Love of Clients, Not Another Questionnaire

Where does this leave the EU wealth management industry?

In a scramble, to be sure.

I anticipate we’ll see many firms settle in the short term for a basic sustainable preferences questionnaire approach. It may tick the regulatory boxes, but will suffer from all the same shortcomings that afflict risk tolerance questionnaires: unpleasant client experience; unclear what, exactly, they measure; highly subject to bias; imprecisely connected to product recommendations.

It’ll land these firms with another profiling questionnaire that advisors sheepishly put in front of their clients—backward engineered from regulation and products. It’s a poor band-aid that underserves the opportunity in front of wealth management firms, and undercuts a healthy client-first approach.

A subset of firms will move speedily (or already are) to test tech-enabled preferences-to-portfolio mini-journeys for clients and advisors. These decision science-based tools are highly engaging for clients, highly supportive for advisors, and differentiating for wealth management firms. Most important, they enable meaningful discovery and conversation so that both client and advisor can proceed through the sustainable investing dialogue with confidence.

Whether you’re scrambling or moving with purpose, be in touch. We’d love to share what we’re learning and building to solve the root causes behind the sustainability scramble.

[i] “Please Don’t Let Them Be Misunderstood!”, 2Degree Investing Initiative, May 2022. Report and findings available here: https://2degrees-investing.org/resource/please-dont-let-them-be-misunderstood/ These figures are from 300 mystery shops across 8 EU countries.

[ii]ESG is Personal: 2021/22 Study of ESG Preferences and Advisory Practices, Capital Preferences, May 2022.