Goals can aid, not hinder, traditional advice

25-May-2017

By Daniel Paperny

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Goals-based advice represented a fundamental challenge to the traditional model of risk profiling of clients, but it was wrong to say there could not be a synergy between the two, according to imac legal and compliance.

In a blogpost for No More Practice yesterday, imac legal and compliance principal lawyer and director Ian McDermott sought to dispel the myth that incorporating a goals-based approach was a new development for the advice sector, given the industry’s traditional tilt towards a client’s personal objectives.

McDermott said since the implementation of the Financial Services Reform Act 2001, when providing advice financial planners had been required to base it on a client's goals, in terms of their objectives, needs and situation.

“Advisers are [now] more willing to either forego a holistic financial plan or break down financial plans into bite-sized, goals-based objectives,” he noted.

“New financial products are being developed that adopt investment philosophies that mean exposures to various asset classes can vary wildly depending on economic circumstances … which all provides tensions and challenges with existing advice processes.

“Clearly goals-based advice challenges the traditional industry approach to risk profiling; it would be easy to say the two don't fit together, but that's not the case [because] goals-based advice simply requires a more nuanced approach.”

He noted that while a plethora of risk-profiling tools were available to advisers commercially and could assist in producing “consistent, repeatable outcomes” in the provision of goals-based advice, advisers should not feel compelled to rely on them.

While understanding a client's risk appetite was an integral part of the process for advisers when it came to complying with their 'know your client' obligations, financial planners also needed to be able to show that approach was well considered and evidence-based, he said.

“Ensure you properly assess and consider a client's inherent attitudes to and acceptance of risk as part of your fact-finding, whether through traditional risk-profiling tools or not,” he said.

“Ultimately, if exposure to goals-based advice or objectives-based products can result in asset allocations that are not consistent with a client’s underlying risk tolerance, the client needs to clearly understand, own and accept this.”

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