Section 01 - Quality advice

 01

Monitoring quality financial advice

It is clear from this enquiry that there are still gaps and improvements required to enhance the overall standards of financial advice within the industry as set out by ASIC and planning associations code of ethics.

 

A positive aspect is that technology is doing its part to ensure consumers are protected by advisers that go outside the parameters of compliant advice. We address these gaps and explain how they can be overcome with the right technology.

Rowene Orr QC (RI and M3 now IOOF) case study FSRC Module 2 - Day 19

1. Is it possible for financial services licensees to adequately monitor the quality of advice provided by employees and authorised representatives, where that advice is provided in a manual environment?

No, not within a manual environment. Unless you have one compliance person checking every piece of advice provided by every financial planner, this would double the cost of financial advice, and the consumer would be left to fit the bill.

2. Are improvements in Technology the only way to ensure that Financial Advisers provide, quality advice?

Yes, however not just improvements in technology, a refocus of the technology used towards the consumers needs objectives and goals.

We have seen recent advances in technology focusing on efficiencies in the old way of delivering advice, the process that has lead to all the problems we have now. Effectively advisers can provide low-quality financial advice, faster.

Advice Intelligence has challenged this process, focusing on quality financial advice delivery at scale.

3. How should financial services licensees ensure that customers of their authorised representatives are adequately protected, while the licensee investigates the conduct of the authorised representative?

Ultimately, make sure firstly that Advisers conduct is correctly monitored in real time to make sure consumers cannot be put at risk.

However, for existing advice that has already provided, and now discovered by a licensee as being at risk, it would require new advice to be provided, using the new advice process and platform that provided quality financial advice delivery. With compliance monitoring and supervision built in, followed by any remediation to make sure the client has had no financial loss.


4. Taking into account that it may never be possible to reduce the risk to zero, what is an acceptable level of risk that customers will be provided with inappropriate advice?

Explain

Rowene Orr QC (NAB, Westpac BT) case study FSRC Module 2 - Day 19

1. How can financial services licensees best incentives the provision of good quality financial advice? Including in situations where the best advice for a customer is not to change anything at all?

The first step is defining quality financial advice and the process of how quality financial advice id delivered and then tracking the delivery through a platform that recognises this process.
We liken this professional process as similar to a doctor-patient consultation;

When you go to see your doctor, your doctor gathers as much information required to either diagnose a condition or conclude your state of health; They may request further information or tests before proceeding.

If they diagnose a need to for further treatment or a recommendation, they will describe a strategy to treat that condition, then and only then will any medication if required be prescribed.

The process which is very similar to quality financial advice starts with client due diligence, then strategies to help, then products if required.

By using the Advice Intelligence Goals Based Advice Platform, all advice follows this process. Starting with client goals, client details, and then moves to strategies and stress testing those strategies, making sure those strategies all relate back to client objectives, and any products recommended demonstrate the advice puts the clients in a better position.

This platform keeps the advisers within a framework for quality financial advice delivery.


2. How should financial services recognise and reward ethical conduct by financial advisers?

To recognise ethical conduct, we need to see the adviser demonstrate the correct advice process, to providing quality financial advice, to see the improvement in the client position, provided by implementing a strategy, not just a product.

This strategy may include keeping an existing product or maintaining an existing strategy.

Rewarding ethical behaviour can be done through financial reward, or through recognition, and/or peer recognition or the ethical behaviour.

A combination of these two would work well, and publication of positive behaviours creates marketing opportunities for the business.

The Advice Intelligence Goals Based Advice Platform, can provide both clients and financial advisers with positive reinforcement when tracking towards goals. 


3. How can financial services licensees, best ensure that the results of routine compliance measures such as compliance audits are appropriately escalated, so that potential risks to customers are identified and managed, promptly?

Explain... have everything completed within a software platform....

 

 

Why are financial goals critical?

As well as improving a client's chances of achieving their dreams, goals based advice also makes the entire advice process more engaging and relevant. By placing their goals front and centre, clients are constantly reminded of the 'why' that’s driving them, and gives them a greater sense of control over the future.

This sense of connection to long-term goals is hard to achieve using any other methodology. The main problem we've faced? Until now there has been no financial planning software that makes goals based advice an easy and interactive process.

Goals are outcomes focused

Goals require clients to look forward and ask what they’d like to achieve across their projected life journey. Once they’re in this mind set, it’s much simpler to map back to optimal advice strategies and investments.

Goals facilitate scenario planning

They help facilitate the advice conversation, illustrating to clients the probability of what they ‘can’ or ‘cannot’ achieve based on current behaviours and circumstances. More than that, this approach allows clients to visualise how different trade-offs and future events may impact their future, from life events to economic crashes.

Goals improve life achievements

Goals based advice demonstrates the true value of advice. By allowing clients to directly track advice strategies to their specific life goals, they’re able to identify whether they’re ‘on’ or ‘off’ track throughout every step of the journey.

The evolutionary role of the Financial Adviser

Accountant, investment quant, life mentor, actuary, and sales negotiator. These are some of the roles that financial planners have traditionally had to assume in their work with clients. It's no surprise that increasing regulatory pressure has resulted in many seeking to leverage technology, to redefine their business models, so they can reassert their focus on client relationships and the softer skills necessary to manage them.

The rapid growth of FinTech, combined with consumer and regulatory change has resulted in the evolution of the adviser role. Data, machines and algorithms will soon outperform a lot of the calculator, research and administrative functions. The industry is undertaking an important step towards automation. These modern advancements will see the advisory role to focus on the client relationship, role as a financial life coach and relationship manager, improve financial literacy and improve financial outcomes for Australians.

 

Section 02 - Technology improvements

 02

Technology improvements

One inherent problem with this industry is that incumbent technology platforms that form the backbone of this industry has failed Licensees and advisers. They don't support todays regulatory environment, and they don't support the financial planning customer experience and client management obligations.

 

Incumbent technology is fraught with manual processes and exposure to human error, they fail the overall advice process, as a result advisers can only be reactive rather than proactive in regards to advice production, delivery and monitoring. 

 

Lets take a look further into the failings

Rowene Orr QC (Westpac BT) case study FSRC Module 2 - Day 19

1. Are improvements in Technology the only way to ensure that Financial Advisers provide, quality advice?

Yes.... explain... With automated compliance built into the customer experience, a.i. ensures there is a visible trail of all client interactions. A complete record of discussions, scenarios, decisions and recommendations is a critical element in shaping the ongoing quality and monitoring of advice delivered to clients.

2. Can financial advisers effectively manage the conflicts of interest associated with providing advice as a representative of an institution, that also manufactures financial products, is in necessary to enforce the separation of products and advice?

Yes... how... product comparators.

 

3. Is the current division of responsibility for the professional discipline of financial advisers between employers, ASIC and professional associations, operating effectively, to ensure financial advisers face appropriate consequences for breaching their statutory and professional obligations?

No... why.... how. closed architecture - open API between ASIC, Adviser Ratings and the Financial Planning Platform to exposure quality advisers, keep track of their licensing, education, qualifications, professional development, misdemeanours and ratings and expose this to both ASIC and the consumer real-time.

Remote audits.


3. Does that division of responsibility create gaps in the disciplinary system, if so what are they?

Disciplinary system could be proactive rather than reactive.


4. Is it possible to implement a single system for professional discipline of financial advisers, would structural changes to the financial advice industry be required to bring that about? Would a system of licensing at both an individual and entity level be more appropriate than the existing system of licensing at only the entity level?

 

 

 

 

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Section 03 - Protecting consumers

 03

Protecting consumers with compliance measures

Modelling a household's financial circumstances and future scenarios has always been an important tool for financial planners. It is a critical element within the customer experience, to develop a robust and fact-based foundation around the advice financial planners provide to ultimately help clients meet their lifestyle goals.

Goals based advice for the consumer

Rowene Orr QC (Westpac BT) case study FSRC Module 2 - Day 19

Explain GBA....


1. How can financial services licensees best incentives the provision of good quality financial advice? Including in situations where the best advice for a customer is not to change anything at all?

Pre-emptive controls explain....


2. How can financial services licensees, best ensure that the results of routine compliance measures such as compliance audits are appropriately escalated, so that potential risks to customers are identified and managed, promptly?

Dealt with upstream in the advice process. Advice process is flawed.

Modelling a household's financial circumstances and future scenarios has always been an important tool for financial planners. It is a critical element within the customer experience, to develop a robust and fact-based foundation around the advice financial planners provide to ultimately help clients meet their lifestyle goals.

Rather than looking backwards, goals based investing seeks to identify a client's future goals. By clarifying their priorities, time horizon and behavioural preference towards risk, goals based investing helps maximise a client's chances of success, using a more flexible portfolio design methodology.

Multi-dimensional financial modelling

In modelling, the traditional linear approach to this type of analysis often asks more questions than it answers. This leads to gaps that advisers fill through assumptions, rules of thumb and a host of other behavioural biases that are well documented.

Until recently, limited computation power meant that providing true asset liability and cash flow calculations was nigh impossible. Most financial planning software and excel spreadsheets, of what forms the basis of advice modelling in this industry, are linear, not multi-dimensional. In the age of algorithms, artificial intelligence and big data, there is a genuine opportunity to reduce the size of these gaps to create a more quality, meaningful and focused conversation between advisers and their clients.

Unsurprisingly, financial planning is a complex business, but at its heart lies a simple mathematical equation: assets and income need to meet an investors changing expenses over time.

 

 

This is known as asset liability matching, an intelligently designed strategy employed by large businesses and institutional investors for decades. This is the practice of projecting a series of lump sum cash amounts to be available at specific dates, at specific times, in the future. In particular looking at liquidity, (time/risk) income and future value. Example use cases include; funding retirement, setting aside funds for children's education, a planned home renovation or the purchase of an investment.

The intelligent design and power of a multi-dimensional modelling engine, one that can produce thousands of scenarios, economic stress tests, permutations and combinations of strategies, will evolve the industry into more interactive complex problem solving for clients, via optimisation and machine learning.

This modelling power behind the user experience will demonstrate to a client, in near real-time, their current circumstances, and how to bridge the gap from where they are now, to where they want to be in the future - aligned directly to the achievement of their financial goals. This interactive "what if" and "trade off" analysis can deliver an incredibly engaging financial advice experience, doing much of the grunt work of an adviser and paraplanner.

It sounds simple, but in reality it is incredibly complex.

Sophisticated financial modelling requires a unique and specialist skill set that has traditionally been the domain of institutional businesses and actuarial firms, we now see this skill set flow into financial planning technology.

This will further add to the confidence and trust in the analysis that forms the basis for advice in this industry, leading to a stronger adviser client relationship and ultimately improved socioeconomic outcomes available for more Australians.

 

Goal tolerance for investing

Goal tolerance in investing is different. Rather than looking backwards, it seeks to identify a client's future goals. By clarifying their priorities, time horizon and behavioural preference towards risk, goals based investing helps maximise a client’s chances of success, using a more flexible portfolio design methodology.

The primary aim is always to maximise a client’s chances of achieving their specific outcomes, whatever they happen to be.

In the traditional approach to asset allocation, an adviser would start by asking a client for their goals. They would then amalgamate these goals into a single wealth portfolio view based on their risk tolerance score; a questionnaire that determines their attitude towards risk - called Strategic Asset Allocation (SAA). This asset allocation by definition is more backwards looking, it would have an expected return based on historical or expected performance benchmarks over a certain time-period.

As illustrated in the below asset allocation diagram, an example of a short-term goal would generally have less exposure to risk (eg: liquidity = cash) vs a longer-term goal that would accommodate more risk exposure (eg: growth = equities). Similarly, a person may tend to take on less risk for essential items, such as living expenses, and higher risk for more discretionary items like the purchase of a boat. Each goal not only has its own unique risk vs return, but we also must consider today vs tomorrow, and each client’s individual expectations and preference.

 

 

 

While the foundation of the industry is built on Harry Markowitzs Modern Portfolio Theory, many modern behavioural & financial economists see flaws in the current mathematical portfolio theory – as it assumes that people act rationally, and make assumptions around their predisposed knowledge of financial markets. This theory is inaccurate and we must take into consideration that what people think & feel today may be different to how they think & feel tomorrow – and that others may influence a person's decisions and biases at any given moment.

As goal achievement is more meaningful and personal to clients, rather than outperforming a market by a percentage or a benchmark, advisers can more accurately monitor a client's progress back to their goal achievement, and risk is evaluated by goal priority, probability and time horizon, alongside behaviour.

Asset allocation becomes a more flexible and tailored approach for client portfolios.

 

 

Are you Goals Based Advice ready?

Are you ready to deliver goals based advice?
Find out by asking yourself a few questions about your current client experience.

Experience

What does your current advice experience look like from a client's perspective? Is it interactive and engaging?

Feel

What does your advice process feel like for clients? Is it long, arduous & frustrating or short, effortless & empowering?

Capture

How do you capture what is important to a client, including their goals and financial info?

Clarity

Are you able to clearly & interactively demonstrate the value of your advice?

Strategies

Are you able to link client's goals back to advice strategies?

Tracking

Can you track a client's goal achievement along their wealth journey?

Experience

What does your current advice experience look like from a client's perspective? Is it interactive and engaging?

Feel

What does your advice process feel like for clients? Is it long, arduous & frustrating or short, effortless & empowering?

Capture

How do you capture what is important to a client, including their goals and financial info?

Clarity

Are you able to clearly & interactively demonstrate the value of your advice?

Strategies

Are you able to link client's goals back to advice strategies?

Tracking

Can you track a client's goal achievement along their wealth journey?

Last but not least, ask yourself if you'd like advice intelligence driving your work as an adviser? If the answer is yes (or even maybe) find out more here