SPONSORED CONTENT
RP Forum speaker Alexander Boni, from Russell Investments, shared insights into investor bias in client portfolios and discussed effective ways advisers can help protect investors from themselves.
Following the event he spoke to RP about the best way advisers can broach the topic with clients, what lessons can be learned from the institutional market and the crucial role of planning tools.
Investor bias can be a real problem for advisers and clients. How do you suggest advisers broach the topic with clients?
To my mind, education is always the best defence against the bad behaviours that investing can uncover; it’s far easier to spot our bad behaviours and stop ourselves from making mistakes if we understand what those behaviours are and why we make them. The rollercoaster of investor emotions is a classic example of this. The euphoria we feel when investment markets approach their peaks tempts us to invest more when it is actually the worst possible time. Conversely, when markets crash and burn our instinct is to sell up and walk away, again at the worst possible time.
We produce our literature with this goal of educating investors while reaffirming and championing the value that financial advice provides. We believe that if you provide an element of financial education to your clients throughout your relationship with them, you’ll prepare them to be ready for when the extremes come.
What lessons from the institutional market can advisers apply to help individual investors?
While the institutional and personal pension landscapes are very different, there are most definitely some aspects that translate very well. For example, I spoke at the RP Forum about the funded ratio – in simple terms the concept of taking a corporate scheme’s assets and dividing it by its liabilities in order to get an idea of how well funded the scheme is.
The principles are no different to individuals who often have a pot of savings built up in the form of self-invested personal pensions, personal pensions, ISAs and the like (their assets) and need these to be able to cover their future liabilities (their retirement income).
Our Funded Ratio Tool is packaged up and presents in a way that makes this easy to understand whether or not somebody is doing enough to adequately prepare for their retirement and what explore what levers they can pull to improve their funded status. Can they afford to contribute more? Can they stomach more investment risk? Are they open to reducing the level of retirement income? Is deferring retirement an option?
It can help make an incredibly complex area of advice much more relatable and understandable to those who aren’t specialists or professionals.
How important are planning tools to the process of advice?
Tools can be incredibly useful for creating illustrations and supplementing conversations, but it’s important to be using the right tool for the job. There are a number of all-singing-all-dancing tools out there that provide really powerful outputs – but if your client isn’t interested or doesn’t understand them, are they really useful (and therefore important)?
I would argue that the way the tools are explained to and understood by clients and thus the way they help increase understanding and engagement are the most important factors in assessing their value. I’ve seen clients who really love straightforward illustrators like our Funded Ratio Tool and others who aren’t in the slightest bit interested because they trust that their adviser has everything under control!
Ultimately, tools are just a way of opening up wider conversations as part of the financial planning process. They can take complex, theoretical discussions and make them more understandable, which in turn encourages people to engage with them and therefore helps them realise more value from the financial advice service that they receive.
Automation and ‘robo-advice’ is growing in the UK. Do you think it has the potential to overtake traditional financial advice?
So-called ‘robo-advice’ is probably better named as robo-guidance because it is a very broad proposition and really boils down to be an application of financial technology that simulates financial advice rather than emulating it. In terms of raw adoption numbers in the UK, it absolutely will ‘overtake’ traditional financial advice in the same way that having a savings account at a bank has ‘overtaken’ financial advice.
But that doesn’t mean that financial advice is any less relevant (it definitely isn’t) or that robo-guidance necessarily provides value (an app is a means to an end).
What is interesting is seeing how traditional financial advice businesses are increasingly leveraging these financial technology applications to supplement their own value proposition; they take the best of robo-guidance’s richly featured client portals and tools and embed it within their deeply personal service.
To my mind, it is absolutely the way forward for the financial advice profession, especially when it comes to attracting the next generation of affluent, tech-savvy clients. Technology is great when it’s applied properly and I really do believe that financial advisers can apply it more powerfully and meaningfully than robo-guidance can.
The post Tackling investor bias: Use the right tool for the job appeared first on Retirement Planner.