Process driven planning central to regime

This isan open letter to directors of institutional financial planning groups.

As a director of a large institutional dealer group, you will be forced to change your business model and processes once the Financial Services Reform (FSR) Act is fully implemented.

You will neither be willing to accept or be able to afford the personal and brand risk that occurs when individual planners are allowed to control how they engage clients in the financial planning process. This autonomy leads to undetermined and unquantifiable levels of risk for you and your dealer group.

In the future, new business structures, process and outcomes (the plans) will, by necessity, have to be highly structured, replicable and compliant.

Clients with similar circumstances and needs must have the same ‘planning’ experience and receive similar plans, despite seeing different planners.

The law is precise — directors of financial planning dealer groups are personally responsible for the advice their proper authorities provide and this advice must be based on individual client’s needs.

The logical step for directors who are concerned about this unlimited personal liability is to ensure that the advice provided by their proper authorities is ‘needs based’. There are two barriers to achieving this assurance: the client and the planner.

The client, while coming to the planner for advice, comes with a variety of misunderstandings and false expectations regarding their goals and their ability to achieve those goals. Generally, their goals are ill-defined and they do not understand what it will take to achieve these goals.

They do not know what their goals are and they have little idea of how to achieve them.

Therefore, the first and most important step in the financial planning process is a financial diagnosis. It is our argument that the vast majority of financial planners are not trained, do not have the tools and are not remunerated to undertake this type of diagnostic work, without which, needs based planning can not occur.

Financial planners have not been trained to probe clients’ understanding, expectations, goals and aspirations. They have been trained to calculate ETP cash-outs, social security entitlements and redundancy payments. The tools that they do have, such as investment risk profilers, are at best imprecise and at worse deceptive and misleading. How can the answers to five to 10 questions, half asking how old the client is and the balance attempting to assess risk tolerance, generate an asset allocation that meets the client’s needs?

The situation, therefore, is that neither the client nor the planner knows what the client’s goals and needs are. Neither understands what financial and investment risks the client is willing to take. And, because the planner does not have the use of robust projection tools, even if the client and the planner came to an agreement as to the goals, the financial planner generally has no way to project potential outcomes.

With no pathway to the future agreed between client and planner, it’s hardly surprising that any reviews conducted focus predominantly on short-term investment outcomes and not the controllable aspects of the client’s plan.

The solution is not having the planner telling the client what to do. This is, in fact, the very behaviour that will place the directors of dealer groups in front of the Australian Securities and Investments Commission (ASIC) or a judge. The solution is to have the client tell the planner what to do. This is called liability shifting — the client takes the responsibility for the direction of the financial plan.

The process of liability shifting accomplishes a number of things:

Appropriate financial goals are agreed at the onset;

The clients are informed of the outcomes of their present savings patterns;

The clients are given a set of options they can work through to achieve their goals;

The planner makes strategic and tactical recommendations based on robust analysis and the client’s decision to implement the agreed plan;

The clients accept the level of investment risk agreed upon; and

The clients are the ones that make the decisions about the plan of action.

Most importantly, the process clearly presents needs based planning. The planner has educated the client, the client has made an informed decision, and you, as a director, have significantly lowered your business and personal risk.

What do you need to do to provide yourself this protection?

Get the message and the process to your planners.

Give them robust tools (valid risk tolerance testing and reliable projection models).

Keep up the pressure for needs based planning.

It would be unthinkable for directors of a dealer group to not insure the assets of their company. But one of the key business insurances, that of compliance with the requirement for the provision of needs based financial advice has, before this time, not been seen as necessary.

The tools are now available to re-engineer financial planning business, so that they are both compliant and more profitable. It does mean that institutional financial planning (and planners) will have to change to process driven and client centric businesses.

(A cautionary note: Goulburn Jail is very cold in the winter.)

Paul Resnik is an industry consultant.