Has crisis delivered a Great Leap Forward for advice?

With the COVID-19 curve flattened in Australia, the public health recovery from the global pandemic in our country, thankfully, has been relatively swift. The economic recovery is less certain. 

What is certain, however, has been the fundamental role of quality financial advice during this period, and the vital role of advice through the nation’s financial and economic revival. 

Lockdown has been a time for home-baked bread, home schooling, gratitude for our essential service workers (including teachers!) and the inevitability of remote video conferences. 

It has also been a period for some reflection, and perhaps an opportunity to spawn new ways of thinking, and to adapt approaches to how business fundamentally operates.

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This ‘change moment’ is a global phenomenon. From a time of historic uncertainty, we are seeing a worldwide Renaissance or reawakening across an entire spectrum of human activity, societal and business structures.

Could the same be said for quality financial advice? Call it a rebirth, rejuvenation, regeneration –  to me the central idea of entering a renewal period for quality financial advice is a useful way to describe how clients have been reassured through quality advice, are trusting the advice they receive, and are seeing the value proposition of advice with fresh eyes.

In other words, it is not necessarily advisers that have suddenly seen the light. Advice practitioners and those who serve the emerging profession have been on a journey adapting their business around client-centred professionalism for years. It is the awakening of the client, who has had the opportunity to experience deeper value in quality financial advice, that is the most exciting and unexpected outcome for the advice industry from the pandemic. 

Further, as the experience of advised consumers in achieving their goals and performance becomes prevalent, we envisage non-advised consumers will seek the same experience and hence see growth in the number of advised Australians.

This catalyst moment represents an opportunity for the emerging advice profession to galvanise, to review accepted business practices and to adapt and innovate. Here is a great chance to enrich relationships with clients both existing and new. Hence my expression: “a great leap forward for advice”.

A RENEWAL FOR ACCESSIBLE AND TRUSTED ADVICE 

The March 2020 decision by Government to close our nation’s borders and effectively ‘shutdown’ the Australian economy resulted in an immediate ‘fight or flight’ investment response. 

There are stories of many non-advised Australian investors fleeing to cash during the early days of extreme market volatility. This emotion-driven flight response to build up ‘defensive’ cash reserves (triggering capital value losses in many equity portfolios) was a crisis characteristic we have seen in the past – notably during the 2008 Global Financial Crisis (GFC).  

Crystallising a loss at the depths of a crisis is always a difficult and harsh reality for non-advised investors. Also, many Australians simply wanted to take back some control at a time of fear and feeling disempowered. Such decisions and the losses incurred would no doubt have been curbed if more Australians were guided by a trusted adviser. 

What is the evidence for advised clients? Several of our licensee clients have said that most clients maintained their long-term investment strategies. By staying the course, they are now starting to see light at the end of the tunnel and some early tangible benefits.

Coached by their adviser, clients have the benefit of professional guidance, often resulting from experience over several investment cycles. Advisers managed downside risks and made asset allocation or strategic investment switches based on unemotive decision-making, quickly, cushioning clients from any irrational behaviour. Clients experienced the comfort zone of being advised. 

This begs the question: how can more Australians gain access to the comfort zone of a quality financial advice relationship, especially in a time of crisis? Part of the answer to this is of course technological. The effective deployment of innovation in the technology space in support of quality advice is inevitable. Another part of the answer is the emergence of different, innovative advice models. For both themes there is some precedent for this, as our firm has already seen since it was established in early 2012. 

Following the GFC many Australian advisers experienced feeling ‘dis-abled’ to act on behalf of clients quickly. The dominant sense of frustration and client fear took hold as the value of client portfolios fell.

The harsh lessons of those days led to some fundamental changes, a new advice model for some advice businesses who wanted to take back control for their clients. These pioneering businesses sought the tools to be enabled and provide investment management services that were nimble, decisive, and swift. In turn, they adopted managed accounts, specifically managed discretionary account (MDA) structures, for their clients and businesses. 

According to the 'IMAP Milliman Managed Account Funds Under Management Census’ as of 31 December, 2019 funds under management in managed accounts stood at $79.29 billion, an increase of $7.9 billion on the 30 June, 2019 total of $71.38 billion.

In Australia, the MDA category remains the largest compared to the overall managed accounts flows, with a 6.5% increase in six months. However, platform based SMAs are growing at a faster rate and closing in on the MDA total. 

IMAP predicts managed account growth will continue to outstrip growth in platform funds under advice - which suggests that most growth is coming from advisers who are recommending managed accounts to existing clients. 

Leading that growth, I believe, is the clear and noble function of the trusted adviser acting as the guiding hand to make measured, educated decisions for the longer-term benefit of their clients.

THE EFFICIENT, COMPLIANT, SUCCESSFUL ADVICE PRACTICE

In terms of efficiency, we have seen a significant uplift for practices who have embraced an MDA or separately managed account (SMA) structure. Managed accounts save advisers 13 hours a week and allow advisers to focus more time on client relationship management. 

There are several other tangible benefits including the reinforcement of trust between adviser and client, a stronger sense of meeting the bespoke needs of the individual client, and a sense of regulatory confidence addressed by the ability and duty of acting in the best interest of each and every client. 

The global financial services system may be going through unprecedented stress due to the pandemic crisis but our compliance and regulatory obligations remain constant. In fact, it could be argued we need more reliance on appropriate checks and balances more than ever when the pressure is on and decisions are being made in the heat of battle.
Making a positive difference to a client’s life in a downturn 

It has been a positive experience in recent weeks to hear firsthand stories of advisers making a meaningful difference for clients during these volatile times.
With news of COVID-19 impacting global markets, we observed little to no evidence of panic selling. 

Rather, those licensees using managed account solutions reported clients understood the unpredictability of COVID-19 and its economic impact. This came in two forms; those clients who had long-term investment strategies were willing to ride out the volatility with their adviser and those who had already positioned for the downside late last year were able to opportunistically deploy available capital. 

Those businesses and advisers operating a managed account model, particularly MDA structures, were able to make and implement decisions and adapt to changing market dynamics very quickly. 

As managed account investment managers managed the portfolio, this left the adviser available to manage the stress of market gyrations and be highly proactive communicating with clients via video conference or telephone calls. The frequency of these calls was reported to move from quarterly to weekly to daily as the crisis worsened. 

The most crucial element that an MDA structure provided advisers throughout this crisis was control – enabling them to proactively act quickly.  

One early benefit in the period was the discipline of stop/loss strategies used to shelter from increasing volatility. The MDA structure also highlighted its ability to efficiently re-allocate investment capital opportunistically into company capital raisings, which were at prices that represented a deep discount. For this advice business they were able to effectively execute for a large number of clients fast and efficiently.

A LEAP INTO THE FUTURE FOR THE ADVICE MARKET

There is no question that as we emerge from the pandemic-created period of change, that some form of new normal for advice and advice client relations will emerge.

We believe this will be characterised heavily by the easy wins: new adaptations and clever technology uptake, and the further freeing of time to focus on the humanistic aspects of advice: trusted counsel, stronger relationships and the emotional security of being in the advice comfort zone. 

Above all, one thing that will remain steadfast and likely continue to grow, is the need for quality, trusted advice that prepares for the worst but also remains optimistic for the future. 

The global COVID-19 pandemic has delivered a historic period of enormous fear, uncertainty and risk, but it has also helped to show new clients the best of the advice profession in being resilient, capable, and client-centric, come what may.  

Mike Wright is chief executive of Xplore Wealth.