A market correction can spell disaster for a financial planning business. Time is lost calming clients’ nerves rather than building your business. Some clients may even leave after seeing their capital shrink, and your income may plunge along with the market.
However, this is not true for all financial planning firms. Some businesses thrive during weak market conditions. Businesses that demonstrate value under challenging times gain client trust and long-term engagement.
The difference between a struggling and a resilient financial advisory firm, particularly during challenging and less predictable market conditions, is managing client expectations and portfolio downside risk. In particular, helping clients to focus on their goals rather than the vagaries of market performance.
A goals-based investment approach utilises a client’s individual investment goals to inform their investment time frame and target return. These goals and the client’s desire to achieve them usually remain constant through strong and weak markets. They don’t waver during downturns as their focus is their goal, not the markets. This contrasts with the traditional advice model, which aims to maximise client investment returns for a given level of risk and benchmarks more closely to markets, leading clients to watch markets and ‘jump at shadows’ during difficult times.
People seeking financial advice often seek more than market-linked investment returns. Financial security is at the top of the vast majority of client’s priorities, particularly during today's heightened market volatility. Poor markets that destroy capital value result in disappointed clients and can damage your financial advisory business. This can be compounded by the difficulty of attracting new clients in a depressed market. In addition, some advisers may be tempted to lower their fees. At the same time, those who are remunerated based on assets under management can see their income drop alongside the value of their client’s portfolios.
On the other hand, the more client-focused, goals-based investment approach does away with market benchmarks and instead tracks success against the progress made towards reaching the client’s target return. Clients are also less likely to be concerned about market performance due to their deeper confidence level in their investment strategy. The goal discovery process, which involves discussing your client’s financial aspirations and money preferences – rather than fees and returns – promotes meaningful relationships that can help you provide superior service and highlight your financial expertise. This can help retain clients and boost referrals, even in challenging markets.
Dynamic asset allocation is a crucial factor that helps to protect advisory firms from downside market risk. Rather than just investing within traditional asset classes in pre-set, fixed asset allocations of cash, bonds, property and equities, advisers can employ a more dynamic, goals-based investment strategy. It’s an approach that embraces a broader range of assets, such as commodities, currencies, precious metals and short-selling strategy, that can swiftly adapt their asset allocations in line with market conditions. This reduces correlation with market performance and protects portfolios from volatility and downside risk while specifically targeting return objectives.
Implementation
Leading investors and institutions such as The Future Fund are increasingly working towards a more forward-focused and dynamic approach to investment management. The principal need is to meet client needs in the context of probable asset performance rather than the historical performance of a limited range of asset classes.
The challenge, then, is how to implement it. The answer lies in a unique managed account solution by Dynamic Asset. The solution combines a portfolio suite that each targets specific risk-return outcomes for short, medium and long-term investment horizons. The portfolios can be blended using Dynamic Asset’s unique Portfolio Construction Tool to target individual client goals.
The solution is supported by an onboarding process that embeds the business model, simplifies management and opens a long list of time and money-saving efficiency gains. All while meeting the real needs of today's clients and conditions.
To find out how a goals based investment strategy can help your advice business manage downside investment risk, contact Dynamic Asset today.
