Knowledge and Experience

It is important to ensure that clients understand their investments and the risks they take on. In many countries, it’s a regulatory requirement to confirm this. 

Suitability Compass includes an assessment of a client’s Knowledge & Experience (K&E) across four areas: 

• Confidence 
• Knowledge
• Investment History
• Investment Sense 

Confidence

Confidence is a dimension of each investor’s Financial Personality, as discussed elsewhere. 

The other three parts are discussed below. 

Knowledge

We ask two questions about investing knowledge: the first is about how clients rate their own knowledge, and a second asks about where they have got their knowledge from.

1. Subjective rating – clients select from:
   1. None [1 point]
   2. Basic [2 points]
   3. Reasonable [3 points]
   4. Expert [4 points]

The Subjective score is the number of points of the selected response.

2. Sources of knowledge – clients tick all that apply from:
   1. Course or degree [2 points]
   2. Professional experience [2 points]
   3. Personal investing [2 points]
   4. Reading books / articles / websites [1 point]

The Sources score is the sum of the scores for each ticked item.

Investors are given an overall Knowledge score out of Low, Medium, and High based on their responses as follows:

Knowledge score = lower of Subjective score and Sources score

• Score of 1 => Low
• Score of 2 => Medium
• Score of 3+ => High

For example, a client who ticks “Basic” knowledge for their self-assessment and ticks both “Personal investing” and “Reading books / articles / websites” will have a Subjective score of 2, and a Sources score of 2 + 1 = 3. Their overall Knowledge score will be the lower of these, i.e. 2, which is Medium.

Investment History

Prior investment experience is a likely indicator of familiarity with asset risks and attributes.  

A couple of questions about the length of time an investor has held each type of broad asset class act as an indicator, again with a score out of Low, Medium, and High given as the result. 

Investment Sense 

Investors are given four statements about the nature of investments, covering notions such as “past performance is not a guide to future performance.” 

The extent to which clients agree or disagree with each statement is used to provide advisers with a score out of Red, Amber, and Green. 

Overall Knowledge & Experience 

Outputs

Suitability Compass generates an overall K&E rating for each investor using the four components outlined above. This rating is either Low, Medium, or High. 

Calculation

If an investor has a Low score in either Knowledge or Investment History, then their overall K&E rating is Low. 

Otherwise, if their Confidence score is at least Medium, their overall K&E score is High; their K&E score is Medium if their Confidence is Low. 

However, if an investor also has Low Investment Sense, then their K&E rating is reduced by one level. 

How to use it

There are various ways the output of a K&E assessment feeds into the suitability process: 

Portfolio Construction 

Acts as a sense check on the range of suitable investment options. 

Investor Education 

Provides an indication of the starting point and the gaps to be filled in. 

Communications 

Provides a guide as to how much knowledge to broadly assume when discussing investments. 

Suitable Risk 

Suitability Compass automatically takes an investor’s Knowledge & Experience rating into account when providing a recommended Suitable Risk Level.