Good planning and advice is vital, but it can be quickly diluted if it is not explicitly aligned with the recommended investment solution.
The primary connection between client-focused planning and the associated portfolio recommendation is typically limited to a client’s risk profile or a specific goal.
This risk is also often assessed almost exclusively on the portfolio’s expected volatility based on backward-looking experiences.
However, the recommendation does not often enough thoroughly analyse whether the recommended portfolio aligns with the plan or goal’s other critical factors, including the type of goal, most relevant risk and the desired experience.
Without taking these additional factors into account, the investment solution may not behave in a way that supports the advice assumptions or be managed to align with the specific client goals and risk profiles – and this is what clients will remember the most.
This lack of integration can challenge a client’s trust and how reliable they view their adviser.
Cash flow modelling: Friend or foe?
Cash flow tools can add demonstrable value through multiple real-life scenarios, but their extended use has in other ways further decoupled the planning and investment solution.
They tend to apply a single theoretical rate of return required to satisfy a client’s lifetime needs, rather than present a solution that has a more inherent set of sophisticated market expectations that closely align with the exact portfolio being deployed.
When further considering how the portfolio is being constructed and managed to align with the client, there is a risk of amplifying the delta between the plan and the actual experience.
And as environmental, social and governance preferences become a bigger component of a client’s needs, this will only be exacerbated.
Integrating ESG considerations into the actual investment solution instead of only including in the advice process will further validate the role of the adviser.
Demonstrate value through integration
Advisers should be able to rely on a portfolio being almost scientifically incorporated into the plan and possible outcome, as well as articulate how the portfolio’s components are doing a specific job to diversify it.
By doing so, the adviser will not only build more confidence and trust in their recommendations, but they will further demonstrate their expert value.
Many investment solutions, model portfolios or mutual funds are designed in isolation from a client’s actual needs and sit adjacent to the advice model. However, this issue is reversed when adopting a goals-based solution that explicitly understands which of a client’s needs is being met.
Portfolios that are designed specifically with target client needs in mind are more likely to deliver not only the intended outcome but also the preferred experience – something that is essential when convincing clients to stay the course.
When designing portfolios, it is critical to consider the most appropriate measure of risk applicable to a client’s goal, timeline and appetite.
For example, a client may be more comfortable accepting higher levels of volatility and a lower overall probability of success if the shortfall risk gives them comfort that even if they do not quite make the target goal value, they will not miss by too much.
Using sophisticated asset class research and expert diversification to manage against drawdown risk, shortfall risk or low-growth risk ensures portfolios will explicitly align with a range of investor goals and the context that accompanies a particular goal.
Power with technology
In addition to the portfolio design process being underpinned by investor needs, technology can further enable the integration of how the recommended portfolio aligns with the client’s goal.
Being able to digitally present a portfolio’s probability of goal achievement, cash flow expectations and journey projections can build client confidence.
Showing account asset class and sub-asset class exposures, as well as implementation variables, can also mitigate client expectations of the portfolio’s performance.
It is also critical that the plan is always connected to the portfolio through a live, ongoing process.
As portfolios are adjusted to accommodate changing economic circumstances, a portfolio’s visual representation as it relates to an investor’s goal should also be recalibrated to present how the client is doing today and could be in the future.
Advisers can proactively assess the situation and be prompted to take necessary action instead of identifying such needs only during a periodic review, when the damage may already have been done.
Refocus on investments
Advisers who see themselves as client advocates should not provide an expert planning service and then simply select an investment product that looks like it aligns with the client and their goals.
While this may have been sufficient to be successful in the past (as we saw with an extended bull market), risk takes on many different forms as markets increase in complexity and returns are harder to come by. Now is the time to refocus on the investment part of the process.
Looking ahead, advisers must ensure they can give clients the greatest chance of success – and an equally great personalised experience along the way.
Russell Andrews is global head of advice solutions at SEI Asset Management Distribution
