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A new, client-centric model of advice

While the spotlight cast by the Hayne Royal Commission on the worst practices in wealth management industry has deservedly dominated public attention in the past year, it’s easy to lose sight of a growing global movement toward a client-centric approach.

An increasing number of advice firms in Australasia, North America, the UK, Europe and Asia are embracing a shift from transactional, sales-driven and conflicted process toward a model built upon transparency, independence and alignment with the goals of the client.

The new model of advice is showing the way forward for an industry grappling with increased regulatory scrutiny, growing compliance responsibilities, potentially disruptive technology and a challenge in finding skilled, committed and engaged staff.

Global advisers with common keys to success

Key practices common to many successful advice firms include the embrace of a consistent investment philosophy, an easily communicable value proposition, fee transparency, and a shift from commoditised tasks toward spending more time with clients.

This new model of advice effectively turns prevailing processes on their head. Instead of advice being treated as a sales process, where there is a risk of products being sold to retail investors regardless of their specific needs or risk appetites, advisers start by understanding the clients’ goals and working back from there.

This is potentially a win-win situation. Clients receive advice appropriate to their needs and circumstances. Advisers in turn are energised, transformed from being facilitators to adopting a consistent philosophy and a repeatable, transparent and robust approach to capital markets.

The regulatory challenge

Of course, the evolution in advice is coming at a time when regulators in many countries are taking a much closer and more critical look at conflicts and culture in the advice sector.

In his recent Final Report, Commissioner Kenneth Hayne said that making financial advice a profession was critical to restoring public trust. He urged the ending of the practice of ‘fees for no service’, the reduction of conflicts pervading the industry and the introduction of a credible and coherent disciplinary system for advisers.

In New Zealand, the government is introducing a regulatory regime for financial advisers which requires all advisers to retail clients to be licensed and subject to a code of conduct setting out standards of client care.

In the United Kingdom, the Financial Standards Authority in 2013 implemented a ban on commissions for retail investment advice.

The technology challenge

The growing penetration of artificial intelligence and robo-advice platforms increases pressure on advisers to demonstrate the value of their wealth management services.

Advisers are responding to this challenge by embracing new technology themselves, both to improve the client experience and to reduce the time that advisers spend on basic processes.

So, instead of a binary choice between high-end human advice and automated advice, what emerges is a hybrid model that uses technology to save firms valuable time spent gathering data and uses it instead on real, productive conversations.

This can allow advice firms to offer a tiered fee model that improves the access of smaller clients to digitally-delivered affordable and effective advice, while continuing to offer premium services to higher-net worth clients with more complex needs.

The human capital challenge

Another challenge for advice firms, amid the call for better education standards for advisers, is in finding, engaging and retaining talent. In fact, outside of improving profitability, human capital strategy has emerged as a primary concern among the firms we talk to globally.

Of the major challenges most frequently cited by advisory firms, consistently ranking near the top are recruiting and hiring employees, finding or developing a next-generation leader, and developing employees. Advisers want better training and development, advancement opportunities and career paths, and improved communication around firm goals and performance.

Summary

The advice sector is changing globally. Putting clients first, removing conflicted remuneration, embracing new technology, delivering effective advice efficiently to a wide range of clients, and professionalising the industry to restore public trust can be done and is being done.

The new model of advice is here to stay.

 

Nathan Krieger heads the Australian financial adviser services business of Dimensional Fund Advisors (DFA), a US-based which manages about AUD800 billion globally, including more than AUD30 billion for clients in Australia and New Zealand. DFA is convening a global adviser conference in Sydney on April 3-4 with advisers from around the world (who meet their own travel and accommodation costs).

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