Is it time to derisk advisers’ businesses?
In 2012 the FSA issued consultation guidance on centralised investment propositions and the need to demonstrate robust risk management processes, to mitigate against exposure resulting from the provision of unsuitable advice leading to poor client outcomes.
The guidance still stands, and since then we’ve seen a rise in the use of multi-asset funds, model portfolio services and outsourcing to Discretionary Fund Managers (DFMs).
Some firms prefer to arrange investments themselves continuing to pick funds, construct portfolios and manage ongoing rebalancing. Others choose not to, probably sensitive to the fact that arranging and managing investments can be extremely technical and are often time consuming.
There’s also the likely recognition that if they lack the expertise, the risks associated with getting it wrong are not insubstantial – loss of reputation, loss of a client, loss of revenue, and worse!
So, what are your professional obligations to avoid these risks to your business? They go well beyond understanding the business-as-usual things like attitude to risk, capacity for loss, asset allocation, fund selection and portfolio rebalancing.
They also go further than the need to continuously monitor and understand prevailing market conditions and economic influencers, risk spreading through diversification, asset allocation theory and the correlation of asset classes.
It’s about having the time and knowledge to update your asset allocation model as market conditions change. It’s about being able to carry out well-documented fund selections, benchmark analysis, fund manager meetings or purchasing the best data.
It’s also having the bandwidth and skills to analyse actual vs expected volatility, and avoiding drift away from the risk profile as a result of poor rebalancing. Then there’s the need to accurately review changes in client circumstances and need, and adjust their portfolio profile accordingly. As if that isn’t enough.
So, it begs some important questions. Does this sound like something you are properly equipped to do? Have you the appropriate qualifications and training required? Do you have the systems in place to carry out these functions?
Of course, you may already have an in-house investment specialist team. You could consider building a team, but that would come at a cost you’d need to be confident in more than covering over time. A fully outsourced DFM approach is the likeliest candidate, as is utilising Multi-Asset Funds.
But what does a modern approach to addressing adviser and client current and future needs look like? In my opinion, it’s still most definitely based on solid investment principles and best practices relating to understanding underlying portfolio objectives and how they match to a client’s risk profile and financial planning aspirations.
But there’s more. Nowadays the modern approach for a business delivering first-class advice and excellent client service is increasingly one featuring leading-edge technology. Digital technology purposely integrated into an investment proposition is helping advisers write all types of business faster, more efficiently, at lower cost, and with considerably lower risk.
How, with reference to investments does technology help to de-risk advice?
- It removes risks associated with fund picking.
- It fully automates portfolio rebalancing.
- It creates seamless ties with the client review and back office systems. This means client reviews can be automatically scheduled and never forgotten.
- It supports a range of risk rated portfolios.
- It frees up more time to develop new business and better serve existing clients.
An adviser’s value to a client is to use their knowledge, experience and talent to help meet their financial aims and objectives – to maximise the gains, and minimise the risk. By adding technology to the investment proposition mix this model just gets more powerful.
This is the model I believe in, and I know it works. I call it the digital revolution in investment advice.
