Online strategic advice to be the next regulatory target

The regulatory focus on life insurance advice may seem disproportionate to the business, given that 84 percent of financial advisers spend the majority of their time providing strategic advice on pensions, investments and other non-insurance issues according to Investment Trends.

As such, the regulator’s attention may soon shift to strategic investment advice.

This will likely coincide with the inevitable end of Australia’s nearly three decades of record economic prosperity.

Advisors need to be prepared for some tough questions about their approach to managing other people’s money. They must be able to articulate and demonstrate the robustness of their investment philosophy, processes and performance, including how they build and personalize portfolios, how they manage risk, and how they monitor and measure current performance.

For some advisors, luck has undoubtedly played a large role in their success to date. Above all, this represents a major risk for the future.

Over the past 20 years, Australian stocks, which account for around 21 percent of the average MySuper fund, have returned more than 8 percent per year.

Over the past decade, global stocks, which account for 29% of the average MySuper fund, have generated 8.6% per year.

Analysis of the performance attribution of the average advised portfolio would likely reveal that market movement (not skills) generated most of the returns. A rising tide lifts all the boats.

This does not overlook the importance of diversification and asset allocation, which, according to one study (Brinson, Singer and Beebower, 1991), account for more than 91.5% of a portfolio’s return. However, he questions whether strategic asset allocation or – for that matter – stock and manager selection and market timing are part of the strategic advice proposition.

In most cases, these are inputs to the investment process.

A structured approach

There is no standard approach to retirement and investing in the financial planning industry. Each practice does things differently.

Some rely heavily on their licensee’s research and recommendations to build portfolios. Others have developed their own money management rules and systems or take a laissez-faire approach.

For advisers belonging to a licensee, support takes three main forms: support on asset allocation, research into investment products (for managed funds and equities, etc.) and lists of approved products (APL). Some licensees also provide model portfolios, which advisors can duplicate, reject altogether, or pick whatever they like.

As long as they operate within the prescribed asset allocation and APL limits, advisers are more or less free to provide strategic investment advice as they see fit. This statement does not imply judgment but an honest assessment.

The point is, this traditional approach is under pressure for two main reasons.

  1. Global economic uncertainty and political unrest, exacerbated by COVID-19

The strong historical performance of Australian stocks and real estate has masked loose investment processes within some advisory practices.

But it’s against a backdrop of sluggish economic growth, extreme market volatility, and protracted, ultra-low interest rates that advisers will need to prove their worth and justify their fees.

  1. Put more emphasis on the value of advice

The shift to fees paid directly by the client puts more emphasis on value for money.

It’s more important than ever for advisors to refine their value proposition and be clear about the services they are providing and not providing.

For example, it may be tempting to take credit for asset allocation at the right times, but it is very difficult to consistently choose the best performing asset classes. Advisors must accurately represent their services, after all, they are not fund managers or asset consultants.

They do not set asset allocation goals, conduct in-depth manager and equity research, and do not actively trade.

Advisors provide personalized strategic advice. As part of their role, they leverage external information and input to create personalized portfolios to meet a client’s unique needs, goals and risk appetite.

As such, the performance benchmarks that some advisers use are not conventional but they must still be relevant. This is necessary to demonstrate that strict governance and risk management controls are in place.

Too many advisors are using outdated references that do not pass the ad test. For example, if the CPI plus 2% is their benchmark and they got a CPI plus 4%, they think they outperformed even though the rest of the market got a CPI plus 7% for the same level of risk and price. costs.

This is fraught with danger for everyone involved.

While the biggest indictment against the industry to date has been no-service charges, the next big test for advisors will demonstrate the value of service in their investment proposition, especially if clients are charged separately for this service.

Ensuring a comfortable retirement for Australian workers is too important to be left to chance, thus ensuring even greater scrutiny in the future of counseling processes and service delivery. Obviously, there is much more to consider given the far-reaching implications for all stakeholders. Critical to any solution, licensees must invest heavily to expand their capabilities and ensure they have the support they need to effectively help advisors establish, articulate, and deliver these services for the benefit of clients.

* Neil Younger is Group CEO and Managing Director of Fortnum Private Wealth.

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