John Templeton, one of the world’s greatest investors, once famously said, “If you want to have a better performance than the crowd, you must do things differently from the crowd.” Templeton’s wisdom is particularly pertinent for today’s investors, who continue to pile desperately into overpriced stocks and property markets in the search for yield among record-low global interest rates.
It is no longer sufficient for financial advisors to simply offer quality advice; this is now the new benchmark, with consumers demanding more personalised services and advice that is transparent and easy to understand. Not to mention the ever-higher compliance and ethical standards imposed by regulators. Advice firms need something more to differentiate their services and stay competitive.
Managed discretionary accounts (MDA) address two critical issues facing financial advice firms; the rising costs and inefficiencies caused by increased compliance requirements and changing client expectations for better transparency and investment performance.
These aren’t normal times. All asset prices are inflated, and not just by a little bit. Arguably we are living through one of the biggest bubbles in asset prices of all time given the massive government support required to keep the bubble inflated with massively inflated valuations during such lacklustre economic conditions. At the same time, there is an indelible belief in passive and quasi-passive investing.
The financial advice industry is in flux. Clients are increasingly aware of what constitutes quality financial advice and are seeking highly personalised and transparent services. At the same time, new industry standards are driving up compliance costs, putting traditional financial advice models into question. While this has led some firms to exit the industry, others see the changes as an opportunity to evolve their business in order to remain competitive and even boost their profitability.
Fortunes have been lost because typical investor psychology rarely aligns with investment success. Most investors can recount stories of losing money after excitedly buying at the top to later sell at the bottom or following the crowd into an overhyped stock. This is why astute financial advice firms are switching to goals based investing; an approach that embraces – instead of struggling against – investor psychology for superior results.
It’s becoming increasingly apparent that it’s a dangerous time in markets for investors. Governments and Central Banks around the world have reacted by pumping in immense amounts of stimulus to maintain price stability. But the more astute observers recognise this is a band-aid, not a permanent solution, and that traditional Risk Profile or SAA portfolios are not designed to navigate, or even survive, the future.
The effective management of goals based investment portfolios requires strong investment skills together with ample time and resources, but in return, rewards financial advice firms with satisfied clients and superior business outcomes.
Strategic asset allocation, the hallmark investment approach of financial advisory firms who use risk profiling to determine a client’s investment portfolios, is under the spotlight, with an increasing number of investment firms questioning whether the strategy remains appropriate in light of the seismic shift seen in financial markets over the past decade.
Developing client-centric advice models has been a hot topic for many financial planning firms in recent years, with the duty of acting in the client’s best interest further cemented by the newly established Financial Adviser Standards and Ethics Authority's Code of Ethics. This has led some advisors to question whether the conventional weighting of a portfolio across today’s increasingly volatile and highly correlated asset classes satisfies this duty of care.
