New type of fund needs more objective-based advice
A new type of fund will require a new approach and good objective—based advice framework, which will be far more complex than the traditional risk tolerance-based approaches that have dominated the financial planning industry, Milliman said.
According to its study, the global financial crisis revealed a necessity for a new type of fund where portfolio managers would be given more freedom to invest in a way that met specific investors' goals rather than being confined to traditional strict strategic asset allocation.
However, with the new approach, under which the objectives of investors were now being incorporated into the financial advice process, along with an arrival of a range of new products, there would be the potential to fail without a framework of good advice.
So far advice has largely focused on investors' risk tolerance and the link between the risk and objectives which had been exposed forced the industry to rethink its approach, according to Milliman.
The goals-based advice framework would be expected to help ‘put the pieces together in an appropriate way', monitor progress and adjust in case of a significant change in personal circumstances.
The authors of the report, Craig McCulloch and Michael Armitage, stressed that this type of objective-based advice looked at more than an investor's risk tolerance and how much they could withstand when markets did not perform as well as at an investor's risk capacity and which action should be taken to reach personal goals.
"This is a far more holistic approach which ties the investor's outcome directly with investment and lifestyle decisions. Products — even objectives-based funds — are just a small component," they said.
"It delves into far-reaching aspects of an investor's life and so requires immense analytic firepower to run thousands of potential scenarios. It is only in recent years that new low-cost technology, combined with cloud computing, has made this possible.
"Crucially, this technology enhances the ability of advisers to engage with investors, building a foundation for advisers to distil what their clients actually want. And sound modelling can often reveal an expectation gap, which can encourage investors to make changes."
AUTHOR
Oksana Patron
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