A university-sponsored wealthtech startup based in Liège, Belgium, is keen to make life easier for European asset and wealth managers that currently face sleepless nights. In 77 days, in the middle of the summer holidays, additional client suitability requirements will enter into force in the EU. It will change the way wealth managers interact with their clients.
At its offices not far from the banks of the Meuse river, Sopiad’s eight-people operating team has developed a new software tool that can accurately place customers centre-stage in the investment business by determining their sustainability profile in relation to their risk preferences. It means client profiles will become more detailed, making it easier to match their sustainabilitty preferences in relation to their risk profiles. For client-facing investment managers, giving tailored advice thus becomes much easier.
“The wealth manager, the private banker… he or she who distributes the funds to you will need to ask much more and in-depth ESG questions, and to know exactly what your preferences are when invested in that segment,” said Pierre Nemeth, CEO of Sopiad. “That’s where Sopiad comes into the game, with really, I would say, some disruptive thinking.”
Spin-off from HEC Liège business school
Sopiad, an acronym for Socrates Portfolio-Investor Adequacy, was created in March 2021 as a spin-off from Liege University’s HEC business school, sponsored by finance professor Georges Hübner and operating under a grant from the Walloon government. The firm is included in the 2022 Wealthtech 100 list, a ranking by fintech.global, and is active in the fintech ecosystem in Luxembourg through Lhoft and the ABBL Fintech Circle.
Asset managers so far have only been required to test their clients for their risk appetite. The outcome of this test then means that their investments can be aligned with the seven official risk categories to which investment funds are subjected.
When it comes to sustainability preferences, three out of five clients have never received a matching sustainability proposal from their banks, according to Sopiad. That is about to change. From Monday 2 August, investment services providers will be required to also determine a sustainability profile for their clients, as part of new measures introduced under a delegated act, an update to Mifid 2, the EU’s markets in financial instruments directive.
Sopiad claims to be the first company to be able to provide a “client-centric” rating. The tool is backed by an algorithm that takes the client’s answers to a series of questions. It then matches these answers against the sustainability profiles of the funds in the portfolio, visualising the profile in a digital map that shows both the risk and sustainability appetite.
‘Sapphires’ shows how well aligned portfolios are
In a demonstration of Sopiad’s ‘Safir’ tool to Investment Officer, the client’s profile is clearly mapped in two dimensions and matched with the funds in their portfolio. A number of diamond-shaped symbols, the ‘sapphires’, show how well aligned the investments are with the client’s preferences.
The map visualises tolerance zones and shows the effects of changing values for the underlying investments over a certain period of time and how they affect the overall investment profile. When an investment moves out of a tolerance zone, an alert is triggered.
“This will make for far better and neutral advice to clients, and a higher quality of conversations with clients. It puts the investor in the driving seat,” said David Suetens, former CEO at State Street Luxembourg and chair of the Sopiad’s board of directors. “This choice was simply not there before. It is a big step toward making the investment advice more personalised.”
The “personalised rating” from the Sopiad system “reverses the logic” by also considering the wishes of the client, said Julien Renkin, chief commercial officer. “It puts client centricity at the heart of the rating of the fund. We need to take into account not only the performance and the intrinsic value of the fund, but also the investor profile, the risk profile and the non-financial preference such as in ESG.”
Suitability monitoring
Market testing has found that there is an additional application of the Liège solution: suitability monitoring. “If you are a wealth manager using our solution you transform the diagnostic into a continuous monitoring over time of the products in terms of ESG and financial performance. If for instance a product exceeds a certain tolerance zone, the comfort zone as we call it… then then the wealth manager can contact the investor to review and if necessary adjust the portfolio,” said Nemeth.
The availability of Sopiad’s produced has been well timed with the date in the EU’s delegated act. The company is in active discussions with banks and asset management companies in Belgium and Luxembourg and fully confident that its product will find a loyal audience.
With the regulatory deadline looming, the pressure on the market is there, although regulatory experts widely expect that the industry will be informally given some time before stringent application will be required. The EU’s finance sector will face additional deadlines on other aspects of sustainability in the coming years.
The impossible is not expected
“Don’t spend too much time on what isn’t perfect… regulators will not expect you to do the impossible,” the head of Luxembourg’s financial supervisor CSSF, Claude Marx, has for example told a recent conference when discussing the introduction of increasingly stringent sustainable finance requirements.
Against this backdrop, financial services companies will not be forced to hurry and adopted a completely new approach. Sopiad’s innovation, nevertheless, is worth noting for all those who wish to improve the interaction with their clients in such a way that is suitable for the ESG era. Also, sustainability data will become increasingly accurate in the coming years, and that will encourage even more new opportunities for innovative services such as those provided by the likes of Sopiad.
Still, for companies with new tools like Sopiad’s, generating interest among potential clients won’t be very difficult in a world where legal certainty matters.
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