Risk in Practice (4-Sep-2003): Equipping financial planners for risk

Insurance needs and the compulsion to address them when advising on a client’s financial future cannot be ignored. They can be dealt with under a strategic alliance between planner and risk adviser — an often-touted strategy.

Although there are compelling reasons for doing so, there may be just as many compelling reasons for not entering a strategic alliance. Some practices will not find this a one-size-fits-all solution.

Your practice may be in that mindset right now, perhaps coinciding with the final sprint to the finish line for your new Australian Financial Services licence. Therefore, you have made a decision not to pursue the specialist risk alliance route. What next?

If you have made the decision not to handle any risk insurance advice, then carefully assess how the practice and its authorised representatives must structure the necessary disclaimers and disclosures. A study of the long-awaited ASIC Policy Statement 175 may help to clarify this. Beware of the danger of blanket-limited advice.

If the decision is to handle risk fully, going forward, then let’s start by looking at where you are now.

A common scenario is as follows: you have been reactively writing a small amount of risk; there may be a few agencies in place, or else you are registered as a life broker; there is probably not the strength of infrastructure in the practice to support risk activities, as there is to support investment advising; the extent of training has not gone further than DFP 2 and a few professional development day sessions, and some on-the-job learning to get you through.

(At this point, I would encourage one last objective look at your reasons for not considering an alliance, just to ensure that this decision was definitely a sound business one and not an emotional one. If not, it could be to the detriment of the business, let alone your clients.)

Having reassured yourself that there is a clear path for your practice to embrace risk advising, what are your next steps? It doesn’t take much nous to work out that where you are now won’t cater for an increased emphasis on risk, let alone that you will need more knowledge and skills to even start seriously offering a quality service to your clients.

A traditional gap analysis will best equip you to plan for, and implement, the change. To assist you to do that, here’s a summary of the systems, tools and knowledge needed to ensure ‘best practice’ for your risk practice.

The Practice Infrastructure

* Documentation — Marketing material needs to reflect the holistic capabilities of the advice offering. The new business won’t walk in the door, and to ensure that new revenue underpins the extra efforts and expenditure, the promotion of full risk advising is vital. At the advice end, your letter of engagement, Financial Services Guide and Statement of Advice, as well as your review notification and other communications, need tailoring.

* Analysis and Recommendation — Fact-finding is quite an expanded exercise if it’s to lead well into good risk advice. Get some professional help to do a thorough job of enhancing your current question set. It is surprising how much more information is needed to do the job well, and how much more need is uncovered if the information is comprehensive.

Needs analysis procedures will underpin the adviser’s skills, and so a sound protocol for needs analysis is necessary. This can be supported by research and analysis software, but the software alone shouldn’t be relied upon to pick up all the nuances of every circumstance. This is particularly true of business succession planning, for which specific analysis protocols are warranted. Recommendations and the procedures for report writing, similarly, will generate a need for additional templates and appendices to be added to your library.

* Research software — Product summaries and research will be derived from a software package. There are several good choices, and it will pay you to shop around. Ensure that the business evolves ways to adequately fulfil its obligations to clients if two planning packages (investment and risk) are needed to produce the supporting material for the recommendations, as is often the case.

* Record keeping — File structure and retrieval of archived documents is important for the purposes of assisting with claims management from the client’s end. It will happen, and prompt, professional response and support is what the client (or their dependants) needs at that time.

* Database — Possibly the most important tool from a revenue perspective. A comprehensively populated database is the practice’s goldmine, especially when there are opportunities to market to the existing base, which has not been thoroughly assessed for risk needs. Review capabilities are as crucial for risk as for investment, and an ability to electronically capture all current insurances is mandatory to good client management. Conversely, being able to do exception reporting on clients without insurances is arguably a vital practice risk management strategy.

* Staff support — The new business processing and underwriting, which is inherent in risk business, demands a method of reliable follow-up and management. This is for reasons of good client service and for the practice should a client suffer a potential claim while undergoing underwriting. In this circumstance, the adviser can be vulnerable if the communications have not been thoroughly managed in a timely manner, so file notes are essential.

* Life office relationship management — It isn’t possible to conduct risk advising without developing the underwriting and product support ‘network’ with your most regularly used life offices. It should be easy, however, once you put your hand up as being interested in nurturing such relationships. Much of the on-the-job learning you enjoy should emanate from these sources.

* Management reporting — Getting the results is one thing, but to measure those results is even more satisfying and productive. Knowing your risk insurance revenue streams — by type of business, by type of product, and by first-year and ongoing brokerage — will assist enormously in planning for growth, and in identifying areas of neglect and therefore opportunity.

The Advisory Capabilities

* Concept knowledge — A thorough basic understanding of the theory of risk transfer and the consequences of death/disability/trauma is a given. Applying those concepts to differing client circumstances is a matter only of intellect, analysis and practice.

* Fact-finding — Questioning techniques may be more intense and are definitely more emotionally based than those for investment, and may need to be learned. Most important are to allow the interview time necessary to cover additional questioning, and the recognition and development of the skills to uncover and signal needs by questioning rather than telling.

* Needs analysis — As mooted earlier, this is as much of an advisory skill as it is derived from software. In my experience, training in needs analysis is a must — it is not logical to assume that it is an instinctive skill. This was reinforced for me recently by a question posed to a colleague along the lines of “what’s wrong with using two times salary as a trauma sum insured, as I was taught?”. The application of needs analysis skills in the business insurance market is a pre-requisite to success in this area, and would be pre-supposed by potential clients who need guidance.

* Recommendations — All of the above skills combine to create capacity to write reports on needs and solutions, with product knowledge the only missing piece. This is where a large part of the process can be performed with research software. Then a good basic knowledge of various benefits, particularly income protection benefits and definitions, serves to allow best advice to be delivered in accordance with clients’ individual circumstances.

* Field underwriting — My last column discussed field underwriting, and concluded that the more ‘lay’ knowledge an adviser has regarding likely underwriting attitudes, coupled with questioning the client at application completion stage, the more control the adviser maintains over the communication of the assessment and its implications. This, too, is an area where training will help fine-tune an adviser’s skill by broadening knowledge.

It may be a surprise to note that there is as much in the preceding list of best practice ‘tools’ that relates to the practice infrastructure, as there is in relation to the actual advisory process. This reinforces that risk insurance advice is as much of a discipline as investment advice.

Sue Laing is principal of Laing Advisory Services.