A holistic approach to financial planning

By Raziq Christians, Executive: Retail Distribution

The ongoing professionalization of the financial services industry is a welcome development for clients, and the Global Financial Planning Standards lays down an important marker in terms of financial planning best practice. The financial services industry is largely intermediated, and consequently clients are heavily dependent on financial planners giving advice aligned to their long-term interest. Far from suggesting an all-powerful and all-knowing financial planner, the standards ask financial planners to display emotional intelligence, recognize their own behavioural biases, and coach and nudge clients into the desired behaviour.

While desired behaviour can mean different things to different people, I think we can all agree it should not mean chasing the next big thing (i.e., ‘product push’) or last big investment idea (i.e., ‘past performance’).  There are over 300 key sub-topics in the standards but very few deal explicitly with retirement planning and investing. In fact, the main emphasis is on putting the interest of the client first. Here the standards stress the critical role financial planners play in helping clients to define and stick with their financial goals and, while competent and ethical advice is expected in terms of investments, the standards stress diversification and appropriate risk profiling over superior fund selection or market timing skills.

How can clients ensure that they are not misled by a product sell or past investment performance, but that their financial planner genuinely has their best interests at heart?

In de-emphasizing sales skills and (unnecessary) investment expertise, the standards intentionally set the bar high for financial planning industry best practice, and clients should acquaint themselves with the standards to understand what to expect from their financial planner.  

More to the point, as a financial mutual owned by its clients, with established relationships with financial planners, organizations like PPS are well-placed to play an enabling role in this ecosystem of behalf of our members. Globally, mutual financial companies are increasingly emphasizing the alignment of interests between themselves and their members, and intentionally demonstrating the value-add they bring. 

The benefits of mutuality

Our organization has traditionally framed the benefit of mutuality to our clients in technical terms usually through sharing the profits with our members; allowing our members to include their family assets in calculating the investment admin fees we charge; and by boosting member profit-sharing if they take up other financial products in the group. However, increasingly mutuals around the world are highlighting the long-term alignment of putting their clients interests as the core differentiator to their purpose.

A good example of this alignment is how we think around investing on behalf of our clients. At PPS Investments, we have always followed a multi-management approach to investing and we have consistently applied this both in the management of our Profit-Share Account assets and the investment business we launched in 2007.

Practically, many financial planners subscribe to goal-based investing and as such the alignment between the Financial Advisor, the Client and the selected investment strategy is best met using the multi-manager solutions, wherein rebalancing and manager selection is done by the team of expert professionals who are immersed in meeting the objectives of each fund. This strategy de-risks the Financial Advisor and the Client by leveraging the expert skills of the Portfolio Managers.

For us multi-management makes long-term sense for the bulk of our clients, and we have invested heavily in resources and technology to enable us to follow a consistent and careful approach to identifying managers with skill across diverse capabilities, and diversifying strategy and manager risk. We believe backing managers through their own investment cycles, rather than trying to time the market or managers ourselves, is the best way to deliver long-term performance and build resilience to future outcomes that might surprise.  

Similarly, clients and financial planners that buy into our approach acknowledge the difficulty of successfully timing the market and consistently doing their own fund selection. In this regard, the standards are a helpful reminder to advisors that their core skill set need not be in fund selection, and outsourcing this component to a multi-manager whose long-term interest is aligned to that of their client might be an important component of their holistic financial advice.

The relationship between the financial planner and the client is all about trust. The standards help describe what clients should expect from financial planners and formalizes where the financial planner should add value. This is helpful in driving consistent behaviour from financial planners, and realistic expectations from clients. Importantly, the financial planner need not be a seer with greater insight into the future than the client, but rather a staff to help the client along the path. And the path here is the investment strategy adopted which need not be unduly risky but should rather get the client safely to its destination.