In the realm of financial planning, the choice of investment approach is a critical factor that can determine the success or failure of a business and the financial well-being of its clients. The risks associated with an erroneous investment strategy extend beyond mere financial losses and can have profound implications for the reputation, legal standing, and client relationships of financial planning firms.
One of the primary risks stems from the potential financial losses incurred due to a flawed investment approach. The financial landscape is dynamic, influenced by various factors such as market fluctuations, economic uncertainties, and geopolitical events. A financial planning business that fails to adapt its investment strategy accordingly may expose itself and its clients to substantial monetary setbacks. The impact of market downturns, unforeseen events, or poor-performing assets can significantly erode the value of client portfolios, jeopardising their financial goals and the firm's credibility.
Despite the awareness of these risks, some financial planning firms hesitate to change their investment approach. One key reason is the inertia that can set in when firms become comfortable with their existing strategies. Change requires effort, resources, and a willingness to step into the unknown. Firms may fear disrupting established routines and processes, even if they recognise the need for a course correction. This resistance to change is rooted in the psychological phenomenon known as the status quo bias, where individuals and organisations prefer maintaining existing conditions over adopting new ones, even when the latter may be more beneficial.
Moreover, there is a tendency for financial planning firms to adhere to traditional methods and resist embracing innovation. The industry has long-standing practices and conventional wisdom that may be hard to challenge, especially when there is a fear of the unknown. The pressure to conform to industry norms and the desire to avoid straying from the beaten path can lead firms to stick with outdated or ineffective investment approaches, even when evidence suggests that change is necessary.
Another factor influencing the reluctance to change is the fear of short-term client dissatisfaction. Financial planning firms may worry that altering their investment approach could lead to client concerns or dissatisfaction, potentially resulting in client departures. This fear, while understandable, underscores the delicate balance firms must maintain between immediate client satisfaction and the long-term health of their investment strategies.
In conclusion, the risks associated with a misguided investment approach in financial planning are multi-faceted and extend beyond immediate financial losses. While firms may be aware of the need for change, factors such as the status quo bias, adherence to tradition, and fear of short-term client dissatisfaction can hinder their ability to make necessary adjustments. To navigate these risks successfully, financial planning firms must foster a culture of adaptability, prioritise ongoing evaluation of their investment strategies, and embrace innovation to safeguard both their businesses and the financial well-being of their clients.
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.
