The Conexus Institute CEO and former Mine Super CIO David Bell

Certainty and risk are at the core of quality advice and at the forefront of client communications, and the value of good financial advice cannot be fully appreciated until these understated concepts are viewed as tangible, creditable benefits to clients.

Ultimately, most consumers save towards lifestyle goals, which are largely funded by financial means. And while it is common to talk about the targeted level of consumption, it is just as important to consider the certainty of achieving targeted outcomes and the risks to achieving them.

Let’s walk through the three stages of financial planning with risk and certainty in mind.

First, goal setting. A quality goals-based discussion can’t be had without working through the certainty of achieving a set of goals and the risks to achieving them. Goals could be set unrealistically high, which could result in a high likelihood of failure and/or return seeking choices which risks an unacceptably bad outcome.

Second, ongoing review. Life throws up variability, both positive and negative. There are many possible experiences including financial (investment returns and changes to expected future returns), labour (e.g. promotion or unemployment), government policy (taxes and age pension) or family events (health, kids, care for elders etc.). Along the way financial plans can be updated and goals reviewed. Certainty and risk are central to the client conversation: ‘how are we tracking?’

Finally, retirement, which poses similar challenges but with fewer levers at our disposal because once we retire many of us cannot readily re-enter the workforce. At this time of life, certainty is all important, especially with how it applies to an acceptable living standard given unknown mortality.

In all these phases, there is a danger in understating the concepts of certainty and risk. I think there are two important issues: measurement and communication.

Measuring certainty and risk can be difficult. This requires stochastic (where we acknowledge a range of possible outcomes for variables such as investment returns and mortality) rather than deterministic (where we assume certain outcomes for those variables) modelling techniques. It doesn’t mean advisers need to be able to do the modelling from first principles themselves, but it does mean that at the heart of their business resides an excellent software solution which can do the calculations and produce some great metrics to inform and engage consumers.

Communicating certainty and risk can be challenging. It’s about making complex calculations accessible to consumers. Compare the following approaches to providing advice:

Approach 1: Certainty and risk not at forefront Approach 2: Certainty and risk at forefront
Target (retirement income p/f) $X1 $X2
Certainty This is an expectation, so 50%. We’ve set $X2 to be 80% certain.
Minimum outcome We don’t consider this. We’ve discussed a minimum outcome to be $X3. We believe it is 95% certain.


The second approach provides more insight, helps illustrate more clearly the benefits of the strategies being recommended and better establish the basis for a goals-based relationship between the adviser and client.

Consider the benefits when certainty and risk are made central to the way the advice plan is designed and communicated:

  • Clients will better understand recommendations; not only return enhancers but those used to reduce risk and increase certainty. The benefits of de-risking in stretched environments and using longevity protection cannot be understood unless you communicate in terms of certainty and risk.
  • The ongoing review process lends itself to a much more informed goals-based conversation, including questions around progress towards achieving the target, the need for reviews and whether the strategy needs to be refined.
  • Clients can recognise the true value of financial planning, providing a pathway to achieving financial goals through appropriate goal setting, through reviews which acknowledge certainty and risk and strategies which are designed accordingly.

I’m strongly of the view that the advice industry is significantly downplaying its value-add unless it can make certainty and risk tangible items that headline the service proposition.

If the focus remains on expectation-based measures, advice will find itself mired in pitching itself as a transactional – rather than strategic – service which is forced to justify itself on the basis of outperformance. Be it market timing or investment selection, sustainable outperformance as demonstrated by academic and industry analysis is very hard to achieve.