Begin with client objectives
The core of any advice business is its ability to deliver on the goals, desires and aspirations of its clients. Ideally, all tools, frameworks and solutions should be geared towards this task. Currently, this is not the case. There is a clear disconnect between retiree objectives and advice processes.
The entire advice process should be aligned with clients’ needs, and act to facilitate their understanding of the complexity of this analysis and the ongoing nature and value of advice. In our view, this is a reasonable starting point, but we also recognise that there are some structural challenges to implementing an objectives-based approach.
Take a holistic view
Any advice process needs to take a holistic view of the clients’ financial, emotional and physical needs. Developing a process that can take this into account will be important in terms of how it functions within an advice context.
An update to the traditional risk profiling methodology used by advisers is warranted, as the current approach fails to adequately address the specific objectives of retirees. A questionnaire based on the ‘real’ objectives of retirement should improve the ability of advisers to meet their clients’ needs. The reason
this has not been addressed to date within the Australian market is largely structural – a result of the compliance requirements built into the current processes, on which traditional risk profiling methodologies and software have been based.
Focus on outcomes, not peers
Since the advent of superannuation choice legislation, the superannuation industry has developed an obsession with peer-relative performance that has been embedded through the culture of many organisations, including compensation and remuneration incentives linked to peer-relative measures. An honest focus on outcomes should largely ignore metrics focusing on pure performance and must instead assess the ability to meet a client’s overarching goals.
Replace faux analysis with more informative tools and analytics
There is an opportunity for smarter analytical tools that create a link between a client’s goals and the advice that is given. As advice needs to grow in complexity, the ability to support recommendations with robust analysis will add a degree of confidence and insight to the client/adviser interaction. Our analysis clearly shows that any strategy will have an associated opportunity cost. The reality is that many commonly used strategies, such as the ‘bucketing approach’, are based on loose assumptions that will not necessarily bear out in all market environments.
Ensure the framework is independent of the product
Product should follow advice rather than lead it. Inevitably, a process that is independent of a particular product bias will ensure that the client’s best interest is central to the advice that is given. This will be increasingly important as the universe of products and strategies designed to service this market grows and evolves.
Enhance existing advice processes (evolution, not revolution)
Finally, any change to the advice process needs to recognise the strengths and benefits of the current approach. As described in this Paper, we contend that current advice approaches are flawed, not broken. Consequently, any changes should supplement and enhance the existing approach and provide advisers with the flexibility to adapt the tools to fit within the context of their business and clients. We believe that taking this approach will ultimately result in improved client outcomes.
Advisers that embrace this changing paradigm should benefit from:
enhanced advice that is genuinely client-centric and forward-looking;
deeper and more robust conversations with clients, supported by quantitative analysis;
realistic client expectations and communication regarding the extent to which uncertainty is present in financial decisions, combined with the actions that can be taken (both financial and behavioural) to help alleviate it;
improved use and application of portfolio construction and products; and
most importantly, improved client outcomes.
Click here to read Pourbaix and Millman’s recommendations in full.