Planning for the Future: Highlights from the January Investment Forum Part 2

Planning for the Future: Highlights from the January Investment Forum Part 2

This post is recounting the second half of our January Investment Forum focusing on advances in risk profiling with expert panelists Ed Carey of Timeline, Paul Resnik of The Suitable Advice Institute, and Zahib Bilgrami of Defaqto.

Being able to illustrate to the clients probable outcomes of choices to manage when they’ve lost money is very important.

Ed Carey:

Emotions at that particular point in time are going to be running really high. And what does this mean for my investment pot? I’ve lost a lot of money and what does that mean for my retirement pot? It’s really difficult. So the technology needs to be able to help with that conversational piece that the adviser needs to have, and say, “if the client is really keen to cut their losses and exit the market, perhaps, and run to cash this is what will happen. This is the likelihood of what will happen with that cash investment for the next 10, 15, 20 whatever number of years.”

And hopefully that will shine a light to the client perspective to say, is that the outcome that you really, really want? We’ve discussed before, perhaps, that you wanted to leave a legacy we’ve discussed before, perhaps, that you wanted to retire on this income? It’s going to be very, very unlikely if you cut and run now. So it’s difficult, but let me show you what the long-term probability is of the plan that we agreed. And it’s giving that arm around the shoulder, that if we continue with what we’re doing, you’re going to be okay.

And that maybe the client wants to meet somewhere in the middle, they’d like that long-term plan that they signed up for, but they do want to go a little bit back. That’s fine, and I can show them what the outcome will be. Technology needs to be able to do that really easily in a really engaging way, not by “let’s do a fact find together, let’s do your risk assessment again,” because nothing would have really changed. There may be other views on that, but it’s been able to intuitively show the client the impact of these different options, so they’re reassured.

It’s important to recognize a client’s emotions and reactions, because everyone is different. FinaMetrica asks 25 questions because we noticed that everyone answers the questions in different ways that give us important information. Also, couples are separate people and may have answered the questions very differently and part of the process is helping them understand each others’ view.

Paul Resnik:

Well, first of all, it’s to recognize that there are emotions and that we need to understand their risk tolerance. Everybody’s different. And FinaMetrica asks 25 questions because we discovered that people answer them in all sorts of different ways. Generally, when there’s a different answer from the average answer there’s a reason for that. So rather than just tick-a-box compliance the discussion around risk tolerance is quite revelatory because it’ll be some experience in the client’s past likely to give them that view. The second part is couples are separate people. And even if they have the same risk score, they might have answered the same questions quite differently. Part of a collaborative planning process is to help couples understand each other’s view. The third part was how to illustrate & frame investment expectations. For example if we go back to the 28/29 crash, how long did it take for the markets to recover? That’s a salutary warning.

In the FinaMetrica materials, we looked at the 10 biggest crashes for 11 portfolios with 10% increments of equity exposure from zero equities to a hundred percent and said, “look, see if you can figure out a pattern in this, the biggest falls, are they quick or slow? Is the recovery quick or slow?” And when you look at them you see that they’re all over the shop. Some falls are quick, some are slow. Some of the recoveries are quick, some are slow. And just that discussion, particularly with older clients asking them,” were you there, do you remember ’87? Do you remember 2000?” And allowing them to talk freely about their experience and tie back into their lives and their money. In the end it’s their decision about what portfolio to live with having explained the consequences in terms of their lifestyle and/or their preferred inheritance. And it’s that transfer of responsibility, if you will, that emerges through the process. Can you get the client to own their plan rather than it be your technology or your preferred portfolio? The challenge is that the client must own their own plan.

Over time I’ve created 5 points of great planning: know your client, know the product, show what’s happened in the past to map the portfolio to the client’s needs, recognise that it’s a collaborative decision, and keep re-starting and considering it an ongoing process.

Paul Resnik:

I started the Suitable Advice Institute because I take a helicopter view of the world. As some of you will know, I try to find patterns in behaviour, talk about them and work to commercialise them. And in essence, I came to five points of great planning that I’ll share with you. They’re very simple. First, Know the client as well as you possibly can. The better you know the client, the more intimate your relationship will be, the better the matching of your service can be to them. So don’t treat that superficially.

Second, as we’ve covered already, Know the product. Stress-test the product, not just stress-test the assets, it’s the legal envelope that often blows up and causes the problem. As we saw with various life offices, property funds and Woodford it’s cash flows that are the trigger events. They blow up the fund.

Third, how you meet that suitability piece, show what’s happened in the past to map the portfolio to the needs of the client. And the fourth part is to recognise that it’s a collaborative decision. It’s not the planners. Each client’s trade-offs are absolutely unique. I’ve reviewed industry practice and found the generic suitability algorithm. You weigh this algorithm and you see people who have an entirely different view about the prioritisation of the critical issues of risk tolerance, need, and capacity, and the few other variables– each person weights them entirely by their biases, through their own prisms.

That’s the fourth one– to get those biases out, get the client to own the final decisions – their informed consent.  And the fifth one is start all over again. That’s the ongoing service. That’s both the value of your business and the place to discover the things that change. Risk tolerance does change, people’s lives change, their health changes, their relationships change, their work changes.

Everything can change. The more you know your client, the longer they’ll stay with you, the richer the relationship, the more you’re focusing on existing clients than new ones. And the final place I got to is it’s the 80:20 rule that will prevail. 80% technology, 20% human, the human talks to the client. All tech fails, all human fails. It’s the 80:20 business to aim for.

We need to create plans for every scenario, good or bad, and understand what the client values and how those values and situations shift over time.

Paul Resnik:

Quite briefly it is about a discussion and it is when things go bad, we don’t know how long they’ll go bad for, how well prepared are you? Do you have alternatives? When you move in with the kids will you sell the house? Will you spend less, will you go back to work part time?

There’s a million ways of dealing with that. And they’re hard questions when all is flying well but it’s those explorations that go to understanding the client, my first point. You take them through that journey because the portfolio is almost irrelevant if they’ve got other assets or other ways of entertaining themselves or living. If their goal was to have dinner out five times a week and a trip to Europe twice a year, well, both of those have gone in COVID haven’t they? They probably can’t even buy a new car. The major problem for most of us is getting rid of the cardboard boxes of the stuff you bought from Amazon. Life has changed.

It’s about asking the difficult questions and properly engaging with clients and understand how they’ll deal if things don’t go their way.

Zahid Bilgrami:

So I think it’s in those good times, being able to ask difficult questions and to truly engage with your client as opposed to going down a tick box exercise. Yes, I got the questionnaire done. Yes, they’re a risk level six or whatever it is. I think that to truly understand your clients and truly understand how they’re going to deal in the event that things don’t work out the way in which they expect them to, to be able to truly describe or discuss those outlying situations. I think that that’s quite key in not repeating or learning from lessons from the past.

From all the market changes in the past couple of decades we’ve learned to do better do diligence and to ask the hard questions.

Ed Carey:

I agree with all of that, I think just to get back to the Woodford example as well, with lessons from the past. Some of the things I’ve seen in the time I’ve been in the industry, we had the technology boom in 2000– get rich quick, you must buy this tech fund and everything will be fine. We have split cap, investment trust issues where behind the scenes was a mysterious “I buy yours and you buy mine” kind of club thing going on. We’ve seen unregulated investments have a massive impact on the through the Bespoke SIPP market in the last few years, sounds all sounded a little bit too good to be true. So I guess it’s back to that.

What have we learned from all of that? Better due diligence, ask the horrible questions, ask the really horrible questions to show me, prove it, evidence it. It will hopefully stand us in good stead because unfortunately mistakes continue to be made. Investments in the wrong things continue to be made. So I think a little bit harder due diligence would be more appropriate.

The systems that advisers need to use for younger, less wealthy clients is different from their older, established clients.

Zahid Bilgrami:

I think that certainly with younger people, they’re more likely to be employees within larger organizations. So having systems and technologies that help serve either those larger organizations with their workplace pension type propositions to their employees and maybe there are advice firms then that are employee benefit consultants or others that help employees within those firms to provide them with the tools, the technology, the processes in order to serve those younger people in that environment.

And of course the other, which is a separate point altogether is to have propositions that help with guidance as opposed to advice. Or if you like a skinnier form of advice, as opposed to a fuller form of advice that is compliant, buying both of those are absolutely key in helping those that are younger with shallower pockets, let’s say.

I think we’ll be seeing the emergence of a fixed fee model coming through for young professionals, with use of modern mobile technology to make the tools easy to use at a low price.

Ed Carey:

I think if you look at other industries of what’s worked, what do young working professionals spend their money on, what are they spending on every month? They might pay for Netflix. They might pay for a gym. As far as the economics for an adviser, they’ve not got the big AUM to create a significant recurring fee.

So I think we’re going to see the emergence of fixed fee model coming through. Advisers will consider charging a fixed fee, similar to a subscription level to encourage people to do so. And in return there’ll be access to really modern mobile technology, which people can track all of their investments on a phone and make it really, really simple and easy to use at a fair price. For that to work for the economics and the P and L and all of that to work, it needs to be very-efficient and digitally elegant . And I think we’re going to see an emergence of that in the next few years.

A large part of the challenge is encouraging younger people to put more aside.

Zahid Bilgrami:

I think part of the challenge is not only the sorts of tools, but actually encouraging people who are younger to put more aside. It is a huge battle around that. And unfortunately, the changes in our tax system don’t help. And with that it’s getting that message or getting people to understand the implications of not starting off earlier and engaging with them in order to do so. So that’s a real challenge for society.

When we consider who to integrate with we also look at their API structure and make sure they have everything organized first.

Ed Carey:

A huge amount is the short answer. Making it easy for advisers to engage with us so we have integrations with back office providers. We’ve got integrations with platforms and other providers out there live today and it’s something which we’ll be continuing to invest in. Equally one of the things that we look at when we consider who to integrate with the kind of API structure in terms of how we do things.

We’ve had certain conversations where we looked at a provider, and we looked at the situation and we’ve gone, this is going to be really hard. You need to get your house in order because your structure of how you currently pass data to and fro is going to be difficult. So in those cases we will walk away. What works really well is you seeing a clear API structure, is there a sandbox? Are they publicly declaring how it all works? Fantastic. That’s an organisation which we would put a five star review next to. And we know it’s should be a seamless integration for us both. It continues to be a really big area of investment for us. A lot of people have got a lot of work to do here. It’s not all plain sailing. And that’s one of the areas where we’re quite picky with who we work with.

Advisers don’t need everything integrated with everything else—that makes a mess. What you need is a way to work seamlessly that makes sense.

Zahid Bilgrami:

There is lots of smoke and mirrors in terms of integration and the quality of that integration really differs. It’s just one word that could describe a whole heap of things. So whether it’s a one-way integration or it’s a two-way integration, which Phil as you mentioned, are being brought across, where the integration is just a read, whether you just extract it or whether it’s a read and write, but you’re passing things back, and these are all key considerations and of course different applications may require different depth of integration to get to work in a suitable manner as an adviser.

I’d strongly recommend that if you are thinking of getting two systems to talk to one another, that you’ve actually seen it work before somewhere else, either that or you’ve got the technical expertise in your domain to actually go back and do the integration yourself, which some of the larger organizations may have at their disposal. From a Defaqto standpoint, we have a standard API that we publish is in the public domain that is available. And certainly we’ve used that API with our clients’ preferred back office systems and other tools in order to get them to operate in a seamless manner.

I’ll add that I think it’s really important to understand as an adviser, what your workflow is going to be using your technology. You don’t need everything integrated with everything else. In fact, that’s probably a recipe for disaster. What you do need is you need a way in which you’re going to work seamlessly. So for example, if you’ve got a financial planning piece of software and you’ve got a back office, you don’t need the financial planning software necessarily to be integrated with the platform.

When you’re going to pull the information from a back office system that also has the integration and such. If you could create a spaghetti of mess, if you’ve got everything integrated and everything else, and then you really lose track of where that information’s coming from and going to, so I think thinking of that information architecture built beforehand is absolutely key.

I think we can do more in preparing people in the planning process. It’s also worth just having one default fund that is largely consistent with most people’s risk tolerance so you’re only looking for people that fall outside of that default rather than trying to over-personalize.

Paul Resnik:

This is quite a radical perspective with which is, we’re reworking here, a system that is under enormous stress. I’m blessed at the moment. I’m now a retired investor in interesting projects, so I don’t have anything particular to promote, but it struck me that coaching is separate from planning. And I know there’s a strong debate and concern about it, but I think education and coaching about money, how to manage it is outside the regulatory environment & should remain outside the regulatory environment of care. I think money perverts advice. How that might occur?

I think we can do much more in preparing people if we just think of it in the planning process, that we have more data and mindset prepared. If somebody has been coached before they arrive at the regulated planning piece. The second is something worth contemplating, particularly in accumulation, which is just have one default fund that is largely consistent with most people’s risk tolerance. And therefore you’re only looking for people that fall outside the default rather than try to over personalise the product solution. If you want to democratise advice, if you will, having a default, just simplifies the explanations of risk.

And the third is to be a fiduciary. To be paid by the client and through nothing else. One of the really bland comments that’s come through over the years is to be trusted you’ve got to behave in a trustworthy manner. To do that, you need to be paid directly by the client. So the crux is that if we really are going to improve planning’s reputation, we’ve actually got to break away from conflicts of interest, complexity in portfolios, and tying the regulation of advice to the coaching. These three things need to be done. It’s always so easy to get caught in the past and and remain immersed in regulation rather than to look at your business and try a radically presents product and service to the marketplace.

About The Author

Emma Iskowitz

Originally from New Jersey, Emma previously worked as a writer, researcher, content creator and podcast producer for fintech consulting firm Ezra Group LLC. Emma graduated from London Contemporary Dance School in July 2020, and alongside her work at FTRC she is also pursuing a career in contemporary dance.

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