Inconsistencies in Risk Assessment from Content-Related Factors
Investment suitability depends greatly on transparent and consistent portfolio presentation. Inconsistencies in content and format can significantly impact decision-making, shaping investors’ risk perception and risk tolerance. Such discrepancies may lead to suboptimal investment choices, inaccurate portfolio attribution, greater-than-expected losses, and ultimately, investor dissatisfaction.
Content Inconsistency
Investment suitability is profoundly influenced by the clarity and consistency of portfolio content. Inconsistencies in key areas can introduce cognitive biases that distort investors’ perceptions. These discrepancies may result in misaligned risk assessments and ultimately lead to suboptimal investment decisions, including inaccurate portfolio attribution, unexpected losses, and heightened investor dissatisfaction.
1. Amount Invested
The amount invested ranges from £1,000, £5,000, £10,000, £50,000, £100,000 or a percentage.

Issues:
- Performance Comparison: Varying investment amounts, ranging from £1,000 to hundreds of thousands, make it hard for investors to accurately compare portfolio performance. For instance, a 10% return on £1,000 may look impressive and larger than a 5% return on £100,000, though the latter yields a higher absolute return.
- Risk Perception: Investor perception of risk fluctuates based on the amount invested. While £1,000 might be considered disposable income, allowing for higher-risk tolerance, £100,000 could be seen as a substantial portion of savings, prompting a preference for lower-risk options. Thus, the same portfolio might be viewed as high risk or low risk solely based on the invested amount.
2. Portfolio Choices
The number of options to choose portfolios from varies from three, five, six, seven or even more.

Issues:
- Decoy Effect: Variability in portfolio options can trigger the decoy effect, where additional choices impact decisions. For instance, when presented with a set of three options, investors might feel compelled to choose the medium-risk portfolio, perceived as a safe compromise between the extremes. However, if more choices are introduced, investors may be swayed towards low or low-medium risk instead.
- Misunderstanding of Risk Choices: Investors may experience confusion when attempting to compare a wide range of risk levels across different sets of choices. For example, a portfolio categorised as medium risk in one set of options may actually carry the same level of risk as a low-medium or medium portfolio in another set.
3. Time Horizon
The time horizon varies from one, three, five, 10 or more years.

Issues:
- Risk-Horizon Discrepancy: Varying time horizons can alter how investors perceive risk. For instance, while two portfolios may share the same risk level, shorter timeframes can make losses appear riskier. For example, a one-year portfolio may seem riskier due to potential short-term fluctuations compared to a five or ten-year investment.
- Investment Strategy: The variation in time horizons can influence the investment strategy. Investors with shorter time horizons may prioritise capital preservation and have lower risk tolerance. In contrast, investors with longer time horizons may be more willing to tolerate short-term volatility and focus on achieving higher returns over an extended period. Consequently, the same level of risk is perceived differently depending on the time horizon.
4. Risk Period
Gains and losses are presented as annual returns, lowest & highest year returns or undefined.

Issues:
- Volatility: The presentation of gains and losses in different formats within the risk period can influence investors’ perceptions of risk and return. For instance, portfolios that highlight average annual returns may appear less volatile and more predictable to investors, leading them to perceive lower risk. On the other hand, portfolios showcasing the lowest- and highest-year returns may convey a wider range of potential outcomes, prompting investors to perceive higher risk, even if the average return is similar.
Behaviourally-Informed Suitability in Portfolio Selection
Ensuring consistency in portfolio presentation is essential for accurate investment suitability assessment. Investors rely heavily on how information is framed to make sound financial decisions. Cognitive biases arising from the presentation and structure of information can significantly shape their interpretation of risk levels, time horizons, and investment amounts. These influences may ultimately lead to suboptimal choices. When suitability assessments integrate behavioural insights into their design, firms help investors align portfolio selections with their true preferences, risk appetite, and tolerance. Ultimately, a well-structured suitability assessment, grounded in consistent presentation, is key to fostering investor confidence and satisfaction throughout the investment journey.