For over 20 years there has been a headlong love affair with choice. The rhetorical power of the term suffuses all written communication with clients.
There is hardly a promotional document issued by a planning business, platform, investment product or super fund that does not use the word ‘choice’ as a key feature. Many dealer groups have tried to make unlimited choice their value proposition. Certainly, master funds and wrap accounts are built upon the promise of extensive choice. Choice of investments must be good as it allows the clients to make decisions!
What is missing here is that clients are not able to, nor interested in making these detailed product choices. They have other things on their minds.
Choice for its own sake = bad choice
Many trustees in industry or public sector superannuation funds know that even when given choice, most superannuation members either select the balanced growth fund, or make no selection and are defaulted into that fund. Most dealer group research managers know that financial planners call for more products, but then only support the same three or four managers to any financially viable extent.
What is it about financial planners that makes them believe the only value they add is their ability to provide multi-manager, complex (and unwieldy) portfolios for clients, when all the client needs is a portfolio that is simple, appropriate and understandable?
We have seen examples of plans where clients had $50,000 to invest and the recommendation was a balanced asset allocation, constructed with 14 different sector managers — that must be madness.
Will the client think more of the planner who shows their skill in developing a complex portfolio than of one who simply recommends one multi-manager balanced fund? It is unlikely. Financial planners are judged on their ability to deliver outcomes, not on their ability to create complexity.
Creating investment complexity in the name of choice gives choice a bad name. It blurs investment outcomes and alienates clients from their commitment to invest and save. It actually takes control away from clients and returns it to the financial planner, which is exactly the wrong message to be sending to clients. Instead of saying to clients ‘you can take control of your finances’, the promotion of financial planning skills as the ability to select precisely the correct mix of products and fund managers out of a plethora of choices says to the client ‘you could not possibly understand your financial needs — trust me — I know how to get you the best outcomes’.
There are two failures in this message. The first undermines the client’s confidence in their ability to manage their own affairs. And when you think about it, saying to clients ‘you are not smart enough to manage your affairs’ is not a brilliant marketing stance for a financial planner.
The second failure is that it sets the financial planner up for a disappointed client. When the financial planner’s performance is solely linked to their ability to mix-and-match fund managers and products, they have no control over the outcomes. If even one of their choices fails, the client can lose confidence.
Historically choice has not added value
Over the last 30 years the value of the ‘equity premium’ has been under extreme pressure despite the amazing bull market runs for both property and shares. This fact goes against all of the financial planning promises of maximising investment performance through investment choice. When back-testing the returns from three synthesised portfolios using index performance (where the growth/defensive assets are split 30/70, 50/50 and 70/30) the outcomes have been surprisingly close. Even when there were periods of accelerated equity growth, planners chasing fund manager performance could still have experienced underperformance against their original fixed allocation portfolio (see table below).
The client’s decision should be: ‘if I cannot meet my long-term financial objectives within a 30/70 allocation, am I willing to take on the additional risk for an extra 0.6 per cent or 1.1 per cent additional return?’ The result of this statistical analysis leads to the obvious conclusion that the critical planning issue is not what asset allocation an individual had, but rather that they had an asset allocation they could sustain over long-term investment horizons.
The benefit of a fixed asset allocation in a single portfolio is that the rebalancing automatically ‘sells high and buys low’. This obviously compares well with the ‘buy high and sell low’ behaviour of financial planners (over 90 per cent of new business reported by fund managers is intermediated by planners).
The challenge for the industry, if it is to continue to promote investment choice over lifestyle choices, is it must prove it can and does deliver better returns through choice than an equivalent asset allocation invested in a low cost index fund.
However, if the financial planner has as their value proposition helping clients to make the right decisions regarding good choices, they can control the service delivery and the client outcomes. This is a better business proposition than gambling on the ability of a concoction of fund managers to deliver outstanding performance.
In addition, if the need to offer investment choice is removed, the client can save money. There will no longer be a need for complex platforms to manage administrating and reporting, which will save the client even more money. It will also allow the financial planner the time they need to work through the ‘good choice’ lifestyle options with their clients.
Good choice
There is a real need for clients to make decisions regarding choices within the financial planning process. However, as the smart money knows, the choices that clients want are those that affect their personal lifestyle decisions — not around indistinguishable investment products.
Providing focused advice around the things that clients can control empowers clients; not abstract guessing about the future of managers, asset classes, products or services. Very few clients are concerned about GARP, value, growth, style neutral, or other monikers for fund managers that financial planners jabber on about.
Clients are asking ‘how can I save for retirement, meet current expenses and pay university fees for two children?’, ‘can I afford a new car?’, and ‘should I buy a rental property or invest in shares?’
If these are the decisions a client needs help with, where do financial planners add value? It is in their analytical ability to work through the outcomes of specific decisions. People are hampered in making meaningful decisions regarding choices because of a lack of analytical skills.
For example, a client wants to know if they should buy a rental property or invest in shares. Few people would sufficiently understand the impact of each option to make an appropriate decision. They do not even know what their full range of options is. This is why financial planners see so many clients highly overweight in property investments. Financial planning clients will have their own specialist knowledge; they are not trained to make decisions in other areas. That is why they need a financial planner’s advice.
Clients rely on planners to:
* collect all of the relevant details;
* gain an understanding of their goals, objectives, concerns and preferences;
* help them determine their ability to undertake certain levels of personal and investment risk;
* explain the options available to them and the short and long-term expected outcomes from these options;
* help them understand the risks involved in taking any particular option (even when the option is to do nothing); and
* help them to weigh up the choices and to make a decision on how to act.
The heart of a sustainable value proposition for clients resides in a financial planner’s ability to assist clients to work through their options and the decisions they need to make about the things they can influence and, to some degree, control.
There are four allocations that interconnect within the client’s financial life:
* how do they spend their time?;
* how do they spend their money?;
* how do they manage their insurable risks?; and
* how far beyond their natural ability to sustain investment risk are they prepared to go to achieve their financial goals?
Assisting clients to recognise and then prioritise this often conflicting set of budgets should be the core of the financial planning process. This is where advice adds real long-term value — where choices at the day-to-day level control the client’s ability to achieve long-term results. Should my partner work part time? Can I afford to retire earlier? These types of questions have enormous lifestyle consequences. Instead of making these decisions with little help or outside of any contextual framework, the financial planner can qualify and quantify choice and assist the client to stick to their decisions.
This requires skills in gathering quantitative and qualitative data, sensitive and active listening, and an empathetic approach to problem solving. It also requires an in-depth understanding of the options available to clients — not just a list of approved products. Ironically, these skills are only now being introduced as training obligations for new planners. There are no obligations on existing planners to obtain these skills.
Without the obligation, why should existing financial planners get these skills? Simply because making bad choices for clients is no longer acceptable. And assisting clients to make good choices requires these skills. Obtaining them is a good choice financial planners need to make for themselves.
Paul Resnik is an industry provocateur—you can argue with the writer at:resnik@carm.com.au
