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The problem with goals–based advice is that it makes advisers look bad! Let me explain.
Since Financial Services Reform (FSR) it has been a regulatory requirement when providing personal advice to base that advice on a client's objectives, needs and situation. Talking about goals-based advice as if it is a recent revelation suggests that advisers have not based their advice on a client's objectives previously! But of course this is not the case.
Two major developments make up the latest goals–based trend. First, advisers are more willing to either forego a holistic financial plan or breakdown financial plans into bite -sized (goals – based) objectives. Second, new financial products are being developed that adopt investment philosophies that mean exposures to various asset classes can vary wildly depending on economic circumstances. For example, a product may be exposed to, say, 95 per cent growth assets in some circumstances and 5 per cent in others. Neither development fits neatly into the traditional strategic asset allocation and static risk profile approach of yesteryear. Which all provides tensions and challenges with existing advice processes.
Risk profiling in goals – based advice: the elephant in the room?
Clearly goals-based advice challenges the traditional industry approach to risk profiling. It would be easy to say the two don't fit together. But that's not the case. Goals – based advice simply requires a more nuanced approach.
Understanding a client's risk appetite is critical in meeting your 'know your client' obligations (see for example the recent Storm Financial case). Commercial risk profiling tools are scientifically based and produce consistent, repeatable outcomes. It is not necessary for an adviser to use one of these commercial risk profiling tools but if you don't, you need to be able to demonstrate your approach is well considered, evidence-based, consistent and repeatable.
The traditional investment approach has been to say "you are a balanced investor so we will invest you in a balanced portfolio". With goals – based advice, attitude to risk is still a vital consideration. But because goals-based advice (and objectives-based products) can take a client outside of their natural risk comfort zone, your advice processes need to reflect these added risks.
Eight Advice Tips
Here are eight tips to help you meet your regulatory obligations when providing goals – based advice.
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