If quality of advice is to be the focus of professional planning businesses, then measurement of the effectiveness of advice must be a key issue for the industry. The wholesale funds management industry, and more recently the superannuation sector, have a history of developing measurement tools as a means of promoting their services.
At times this measurement seems obsessive – comparing, for example, monthly performance data – but it is an essential part of informing the market place and ultimately allowing at least a degree of objective third-party assessment and criticism, as well as self-promotion.
Fund managers are scrutinised not only in terms of absolute returns and comparison with their peers but also in terms of the volatility of their returns over various time periods and the benchmarking of this data against objective standards, such as index returns and industry averages.
Sophisticated superannuation funds will measure fund managers and themselves in a variety of ways, including attribution analysis, to understand exactly what the components of above- or below-average performance have been.
A well-managed fund will know, for example, the extent to which asset allocation, as distinct from fund manager selection, has contributed to their performance – and whether or not the combination of fund managers has produced an optimal result in terms of the net benefit after tax and fees.
We do not hear a lot about measurement of the value of advice in the retail advisory space. The industry tends to assert the value added in a generalised way while critics point to the value destroyed by super fund selection or by unethical practice.
Clearly, however, many advisers do add value to clients and some financial planning practices should be able to demonstrate their superiority over others. A measurement system is fundamental both to advancing the professionalism and effectiveness of the industry and to oiling the wheels of market competition.
For example, it should be relatively straightforward – and no doubt some practices do this – to broadly quantify the extent to which value is added from tax and social security regulation advice (and some of their individual components) compared to, say, asset allocation advice; or to measure the value of any individual stock selection advice compared to the value, positive or negative, of superannuation product selection.
It should also be possible to measure at least to some degree the comparative value of all pure investment advice across an entire customer base compared to standard benchmarks. Of course the very nature of advice, as distinct from management, means that there is bound to be a degree of subjectivity in measurement, and practices would need to take considerable care in any public claims they make regarding their performance.
And until the measurement processes become sufficiently sophisticated and objective, ideally involving independently generated assessments, no external party is going to take them too seriously. But quality measurement is an essential component of business intelligence and a basis for business improvement for any organisation wishing to enhance the value it adds to clients. Ultimately any financial services company wishing to be regarded as a professional player will want to measure and be measured against the best.
Self-measurement of the extent to which, and areas where, a practice adds value seems to me to be an excellent place to start for organisations wishing to distinguish themselves from a purely sales culture.
