Good planning and advice is vital, but it can be quickly diluted if it is not explicitly aligned with the recommended investment solution.
The primary connection between client-focused planning and the associated portfolio recommendation is typically limited to a client’s risk profile or a specific goal.
This risk is also often assessed almost exclusively on the portfolio’s expected volatility based on backward-looking experiences.
However, the recommendation does not often enough thoroughly analyse whether the recommended portfolio aligns with the plan or goal’s other critical factors, including the type of goal, most relevant risk and the desired experience.
Without taking these additional factors into account, the investment solution may not behave in a way that supports the advice assumptions or be managed to align with the specific client goals and risk profiles – and this is what clients will remember the most.
This lack of integration can challenge a client’s trust and how reliable they view their adviser.
Cash flow modelling: Friend or foe?
Cash flow tools can add demonstrable value through multiple real-life scenarios, but their extended use has in other ways further decoupled the planning and investment solution.
They tend to apply a single theoretical rate of return required to satisfy a client’s lifetime needs, rather than present a solution that has a more inherent set of sophisticated market expectations that closely align with the exact portfolio being deployed.
When further considering how the portfolio is being constructed and managed to align with the client, there is a risk of amplifying the delta between the plan and the actual experience.
And as environmental, social and governance preferences become a bigger component of a client’s needs, this will only be exacerbated.
Integrating ESG considerations into the actual investment solution instead of only including in the advice process will further validate the role of the adviser.
Demonstrate value through integration
Advisers should be able to rely on a portfolio being almost scientifically incorporated into the plan and possible outcome, as well as articulate how the portfolio’s components are doing a specific job to diversify it.
By doing so, the adviser will not only build more confidence and trust in their recommendations, but they will further demonstrate their expert value.
Many investment solutions, model portfolios or mutual funds are designed in isolation from a client’s actual needs and sit adjacent to the advice model. However, this issue is reversed when adopting a goals-based solution that explicitly understands which of a client’s needs is being met.
Portfolios that are designed specifically with target client needs in mind are more likely to deliver not only the intended outcome but also the preferred experience – something that is essential when convincing clients to stay the course.
When designing portfolios, it is critical to consider the most appropriate measure of risk applicable to a client’s goal, timeline and appetite.
For example, a client may be more comfortable accepting higher levels of volatility and a lower overall probability of success if the shortfall risk gives them comfort that even if they do not quite make the target goal value, they will not miss by too much.
