Fortnum CEO Neil Younger

The intense regulatory focus on life insurance advice may appear disproportionate to activity, given 84 per cent of financial advisers spend the majority of their time providing strategic advice on superannuation, investments and other non-insurance-related matters according to Investment Trends.

As such, the regulator’s focus may soon shift to strategic investment advice.

This is likely to coincide with the inevitable end of Australia’s near three-decade record run of economic prosperity.

Advisers should prepare for hard questions about their approach to managing other people’s money. They must be able to articulate and demonstrate the robustness of their investment philosophy, processes and performance including how they build and customise portfolios, how they manage risk and how they monitor and measure ongoing performance.

For some advisers, luck has undoubtedly played a significant role in their success to date. Critically, this represents a major risk going forward.

For the past 20 years Australian equities, which make up roughly 21 per cent of the average MySuper fund, has returned over 8 per cent per annum.

Over the past decade, global equities, which represent 29 per cent of the average MySuper fund, has delivered 8.6 per cent per annum.

Performance attribution analysis of the average advised portfolio would probably reveal that market movement (not skill), generated the bulk of returns. A rising tide lifts all boats.

That’s not to discount the importance of diversification and asset allocation, which one study (Brinson, Singer and Beebower, 1991) suggests accounts for more than 91.5 per cent of a portfolio’s return. However, it questions if strategic asset allocation or – for that matter – stock and manager selection and market timing are part of the strategic advice proposition.

In most cases, these are inputs into the investment process.

A structured approach

There is no standard approach to superannuation and investing in the financial planning industry. Every practice does things differently.

Some rely heavily on research and recommendations from their licensee to construct portfolios. Others have developed their own rules and systems to manage money, or adopt a laissez faire approach.

For advisers who belong to a licensee, support takes three key forms: guidance on asset allocation, investment product research (for managed funds and shares etc) and approved product lists (APLs). Some licensees also provide model portfolios, which advisers can replicate, reject completely or cherry-pick what they like.

As long as they operate within the prescribed asset allocation and APL boundaries, advisers are more or less left to provide strategic investment advice as they see fit. This statement does not imply judgement but honest assessment.

The fact is that this traditional approach is under pressure for two main reasons.

  1. Global economic uncertainty and political unrest, exacerbated by COVID-19

The strong historical performance of Australian equities and property has masked loose investment processes inside some advice practices.

But it is against a backdrop of subdued economic growth, extreme market volatility and prolonged, ultra-low interest rates that advisers will need to demonstrate their worth and justify their fees.

  1. Greater focus on the value of advice

The shift to fees paid directly by the client is placing greater emphasis on value for money.

It is more important than ever for advisers to refine their value proposition and be clear about the services they do and do not provide.

For example, it might be tempting to take credit for asset allocation in the good times but consistently picking the best performing asset classes is very difficult. Advisers must accurately represent their services, after all they are not fund managers or asset consultants.

They do not set asset allocation targets, conduct in-depth manager and stock research or actively trade.

Advisers provide personal strategic advice. As part of their role, they leverage external insights and inputs to construct customised portfolios to meet a client’s unique needs, objectives and risk appetite.

As such, the performance benchmarks that some advisers use are not conventional but they still need to be relevant. This is necessary for demonstrating that strict governance and risk management controls are in place.

Too many advisers use outdated benchmarks that don’t pass the pub test. For example, if CPI plus 2 per cent is their benchmark and they delivered CPI plus 4 per cent, they believe they outperformed even if the rest of the market delivered CPI plus 7 per cent for the same level of risk and fees.

This is fraught with danger for all involved.

If the biggest indictment on the industry to date has been fees-for-no-service then the next big test for advisers will be demonstrating value for service in their investment proposition, especially if clients are being separately charged for that service.

Securing a comfortable retirement for Australian workers is too important to leave to chance, thereby, guaranteeing even greater future scrutiny of advice processes and service delivery.  Obviously, there is much more to be considered given the far-reaching implications for all stakeholders. Critical to any solution, licensees need to strongly invest to broaden their capabilities and ensure they have the requisite support to effectively assist advisers in establishing, articulating and executing these services for the benefit of clients.


*Neil Younger is group chief executive officer and managing director of Fortnum Private Wealth.

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