How to nail goals based advice

Ian McDermott,  principal lawyer & director,  imac legal & compliance

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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.

  1. Ensure you properly assess and consider a client's inherent attitudes to and acceptance of risk as part of your fact-finding (whether through traditional risk profiling tools or not).
  2. If you consider that a goals-based approach will be in a client's best interests, make sure you properly explain what this will mean for the client and give them sufficient time to properly consider the issues. Model different scenarios (including different economic conditions) and explain the likely impacts for the client.
  3. Keep excellent file notes around risk discussions, including any additional risks that may arise and what these can mean to the client. If a goals-based approach is recommended and/or a risk profile which is at odds with the client's inherent risk tolerance is recommended, the reasons for these recommendations should be clearly articulated.
  4. Before recommending a riskier profile for a client, you should discuss and document potential alternatives such as investing more, adjusting timeframes for particular goals, and amending the goals themselves.
  5. The client’s objectives should be the main determinant of why a goals – based approach is recommended. i.e. it should be demonstrated that the objectives are so important to the client that they cannot change and that the only way to achieve the objective is by ensuring that the objectives are the determining factor and not any additional risk exposure.
  6. Amend your SOA's so that they accurately document the goals-based approach and what it means in terms of risk profiles and risk exposures. Use examples to show what different market conditions would mean for the client.
  7. Ultimately, if exposure to goals-based advice or objectives-based products can result in asset allocations that are not consistent with a client’s underlying risk tolerance the client needs to clearly understand, own and accept this.
  8. As a licensee, you should conduct extensive research into any objectives – based product you recommend. You should be understand the investment process and team behind the product and ‘reverse engineer’ the product through different market conditions to identify how it performs.


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