The transfer of governing powers from FASEA to ASIC, including the wind-up of FASEA from 1 January 2022, places increased demands on Financial Advisers.
The clear focus of changing compliance obligations ensures that advisers act in their clients' best interests. Advisers must align investment products with individual investors' specific needs and circumstances. This places pressure on the traditional means of portfolio management led by the client's risk profile.
The risk-based investment approach aims to maximise returns for a given level of risk. Success is measured by comparing returns against market benchmarks, suggesting that investors should be pleased with negative returns, provided they are less negative than the benchmark. The approach also entails a high level of volatility that can decimate a client's capital, particularly if they need to access their funds in the near term or lose faith in their investment plan and crystallise their losses.
The risk-based approach has little regard for a client's actual investment needs. For example, an investor client may achieve an adequate return via more conservative asset allocation than their risk tolerance allows. Likewise, it may not be reasonable to limit an investment target due to personal concerns about higher-risk investments. Often, a client will be a 'high-risk' investor when markets are doing well or when they feel financially secure but quickly switch to risk-averse if circumstances turn sour.
Fortunately, advisers have access to an alternative approach. Actively managed portfolios that use dynamic asset allocation geared to specific risk-adjusted returns over given timeframes provide just such a solution. It allows advisers to align the investment approach with specific client goals. The approach, therefore, moves beyond Goals Based Advice to Goals Based Investing.
The process starts with uncovering the client's short, intermediate and long-term investment goals. Advisers play a role in ensuring that these are specific and meaningful for the client, as vague or superficial goals, such as 'grow wealth,' may prevent engagement. Showing clients a list of popular objectives, like engaging in further study, starting a business or retiring earlier, can often prompt them to identify suitable goals for themselves.
Next, the adviser helps the client prioritise their goals from those that are essential, such as building up an emergency fund, to those that are nice to have, like overseas holidays or a new car. The adviser then applies a suitable investment strategy to each goal. Essential and short-term goals are often assigned more capital to ensure they are sufficiently funded and a more conservative asset allocation. In contrast, lower-priority goals and longer-term goals, such as saving for retirement, are typically assigned a riskier asset allocation to boost potential returns.
Asset allocation also requires advisers to consider a client's situation. For instance, people with unstable employment cannot usually take on risk. At the same time, older investors are more likely to be interested in guaranteeing a stable income than capital appreciation.
Clients may require assistance if their investment goals do not match their available capital or target return. This can be an excellent time to discuss a client's risk tolerance should they require additional risk to achieve their goals. Advisers may also suggest adding funds or extending the investment time horizon to ensure realistic targets.
Lastly, regular reviews are an essential component. Under this client-focused approach, success is measured by the progress made towards meeting the target return within the specified time frame. The review is also a great time to check that the client's goals remain appropriate. Changing life events, like starting a family, being made redundant or receiving an inheritance, may require adjusting objectives and priorities.
For advisers to take on actively managed portfolios is available through the Dynamic Asset Managed Account solution. Their unique online Portfolio Construction Tool allows advisers to mix and match five professionally managed portfolios to achieve various investment goals.
These Goals Based portfolios meet the full spectrum of client needs, ranging from the Cash-Plus portfolio, which is highly liquid and aims to replicate term-deposit rates after fees, to the Wealth Builder portfolio, which targets a higher return while still limiting volatility to less than 11%. Dynamic Asset's managed portfolio services also incorporate client communications, portfolio construction and reporting for a complete one-stop-shop solution.
In summary, not only does the alignment of client goals and investment portfolio management fully satisfy contemporary compliance obligations, it satisfies the needs of today's clients.
If you're ready to align your client's investment portfolio with their goals rather than a market benchmark, speak to Dynamic Asset today or learn more about our Adviser services.
