Market Volatility

Sudden Financial market movements can be unnerving for even the most hardened investor, and it’s difficult not to panic when trends in the market take a downturn. Unfortunately, it’s not unusual to see investors over react in volatile markets, unnecessarily selling various quality assets only to realise capital gains or even taking the extreme step to sell out of the market entirely.

Investors need to accept that investment markets can often be subject to periods of high volatility during which their confidence can be significantly tested.

So, what can investors better understand to help alleviate some of the concern during these downturns.

Firstly, that Volatility is a normal part of any investment cycle.

From time to time investors will react nervously to external forces such as changes in economic conditions, political uncertainty and prevailing business conditions. Financial markets dislike uncertainty, and investors are also prone to over-react to events that cloud the short-term outlook. Investor sentiment can be heavily influenced by the prevailing messages in the market, it is important to take a step back in these periods and keep a level head as there are traditionally opportunities in such conditions. Understanding investment cycles allows investors to begin to exploit lower prices rather than lock in losses by selling based on emotion rather than logic.

Market corrections can create attractive opportunities as a stock market correction can be a good time to invest in equities as valuations become more attractive, giving investors the potential to generate above-average returns when the market rebounds. Some of the worst historical short-term stock market losses were followed by a strong rebound.

Inexperienced Investors should also refrain from selling down their assets in their entirety with a view to re-entering the markets when conditions improve; those who remain invested typically benefit from the long-term uptrend in stock markets. When inexperienced investors try to time the market they can run the risk of denting future returns by being out of the market and missing the best recovery and the most attractive buying opportunities that are often a feature during periods of pessimism.

Understand the benefits of Diversification. Volatility can make Asset allocation very difficult to perfect as market cycles can be short and subject to bouts of volatility. Investors can spread the risk associated with specific markets or sectors by investing into different investment options to help mitigate the likelihood of concentrated losses. Defensive assets traditionally have a role in most investment portfolios. They are often used to help smooth the overall portfolios return and ensure other elements such as the liquidity of the portfolio, reducing any need to sell out of risker assets when values are diminished.

Don’t get lost in the emotional hype. Whether seeking to buy best performing assets or to sell down when times are at their toughest, don’t be swayed to what you see and hear around you as often the opportunity to gain value from these steps is often long gone. The key is not to react emotionally, don’t let the euphoria or undue negativity of the market cause you to compound the problem through a rash decision. One of the most serious investment implications of following the herd is that investors end up buying when prices are high and selling when prices are low.

Ensure you are reinvesting the income received through your investments to increase the overall return. Reinvesting dividends can provide a considerable boost to total returns over time, thanks to the power of compound interest.

To achieve an attractive total return, investors need to be disciplined and patient, with time in the market perhaps the most critical yet underestimated ingredient in the winning formula. Regular dividend payments also tend to support share price stability and dividend-paying assets can help protect against the erosive effects of inflation.

For some investors the need to generate regular stable income is of greater importance. While the value of the asset may fluctuate in volatile times, the value of investing in quality, dividend-paying assets for regular income remains of paramount importance. Sustainable dividends paid by high quality, cash-generative companies can be especially attractive, because the income element tends to be stable even during volatile market periods.

The benefits of regular investing also make sense. it makes sense to regularly invest a certain amount of money in a fund, for example each month or quarter. This approach is known as dollar cost averaging. While it doesn’t promise a profit or protect against a market downturn, it can help lower the average cost of fund purchases.

This approach may not make sense to the average investor however it is precisely at a time of reducing prices when some of the best investments can be made, because asset prices are lower and will benefit more from any market rebound.

What happens behind the scenes with quality fund managers that can be very successful during these times is Active investment. When volatility increases, the flexibility of active investing can be especially rewarding compared to the rigid allocations of passive investments. In particular, volatility can introduce opportunities for bottom-up stock-pickers, especially during times of market dislocation.

Remember, too, that the stocks you do not own in a fund can be as important as the ones you do own. There are companies in every stock market that are poorly managed or which suffer from fundamentally difficult outlooks; active managers can avoid these stocks. Moreover, the value added by avoiding some of the worst stocks in the market builds over cycles and with the passage of time, making research-driven active strategies particularly appealing for long-term investors.

Flight or Fight… or seek a third option

There are two principal behavioural biases that can kick in during times of market stress, causing investors to capitulate and sell at the wrong time for the wrong reasons: herding and loss aversion. The urge to do as others are doing is a particularly powerful bias in human behaviour that is not always helpful in investing.

More seriously, following the herd means that investors end up buying when prices are high and selling when prices are low. This is known as ‘chasing the market’ – a terrible investment strategy. In reality, it is typically better to do the opposite, buying when others are fearful and prices are low, and selling when other are greedy and prices are high. The best investors know this but for many of us, going against the herd feels very difficult as we have to fight our emotions.

The second bias, loss aversion, is one of the most significant behavioural biases that can affect investment. Experiments show that people take the safe option in gambles that involve gains, but take risk in gambles that involve losses, and that we feel the pain of a loss twice as deeply as the happiness from a gain.

In summary, feeling uneasy during times of volatility is only natural, however always try to remember to take a longer term view, and at the very least appreciate that if your asset allocation is aligned correctly to your risk profile, to a large extent your portfolio should reflect allocations that are already factoring in various levels of volatility that are normal in any investment cycle.

Why I’m a Financial Planner

Eugene Ardino, CEO of one of Australia’s largest privately owned financial advice licensees, Lifespan Financial Planning, shares the story of why he became a financial planner, what he loves about his career and his views on the findings of the Royal Commission.

My father, John Ardino, founded Lifespan Financial Planning in 1994. We now provide licensee services to more than 180 advisers with several $ Bil in funds under management.

It wasn’t a forgone conclusion that I would follow my father into the business. When I was younger I was always interested in the investment side of things and dealing with financial instruments generally. I used to come into the office in school holidays to assist with basic administration. After completing a degree in science with a major in mathematics, I eventually decided to take the plunge into financial planning. I started out as a business analyst, soon after that I became a qualified adviser and then spent a large amount of time in the compliance area, and I’ve never looked back.

But my father is a great mentor. I knew that I couldn’t go wrong if I entered the industry with him in my corner. He is still executive chairman of Lifespan and plays an active role in the business.

I suppose I had the right temperament for the industry in that I always liked dealing with people and hearing their stories. But my father taught me some simple but invaluable lessons about the delivery of financial planning that I still benefit from to this day.

The first was around the importance of communication in building trust with clients. The way in which you communicate sets the tone for everything else. If you don’t know the answer to a question, don’t be afraid to say that you’ll go away and do some research, rather than just shooting from the hip.

Clients will understand that you’re only human and won’t necessarily have the answer to every one of their questions. What they won’t appreciate is if you are not genuine with them. They will sense that more easily than you think.

But the importance of listening was definitely the most important lesson passed on by my father. If you never truly listen to what clients’ financial goals are, you’ll never truly be able to deliver these.

My father always said that in the first meeting with a client, they should do 80% of the talking. You should listen, rather than telling them what you think is important, because what is important is different for everyone.

As we have seen in the Royal Commission, reputation is everything in the financial advice industry. You can’t be successful in this business without a good reputation. We’re extremely proud of the reputation we have and work hard to maintain it. As we grow, we remain very conscious of not losing the soul of the business which is about placing client needs at the core of everything we do.

What keeps you interested in the business? What do you like about what you do?

I like the energy of it. I’m not the kind of person who thrives on routine – quite the opposite, in fact. I love that the industry is constantly changing and as licensees, we’re having to constantly evolve, adapt and innovate.

Year-on-year you can see that you’re making a positive difference to your clients’ lives. Often that’s through successive generations of a family. You go through everything with them – marriage, divorce, buying a house etc.

Engaging younger generations can be challenging but if parents are open to sharing financial information with their children, that definitely makes a difference. I’ve found that the families that are most engaged are those where the parents bring in the kids and include them in the conversation.

I really enjoy the interaction I have with industry participants and clients some of whom are now friends. I get a lot of satisfaction out of the client interaction.

As CEO I have lot of other responsibilities, but one of the main reasons I still see clients, apart from the fact that I enjoy it and find it rewarding, is that it keeps me in touch with what our advisers do on a day to day basis. It also allows me to keep abreast of how the needs of consumers change, which you can only really experience if you are meeting face-to-face with clients. I think I’m a much better CEO for having that client interation, although many executives do disagree with me.

The advice industry is still quite young, so looking for ways to improve the advice process, and introduce innovation, is also a passion for me. Whether that’s technological advancements in portfolio management, SOA generation or compliance, not just through software but through the use of instruments such as MDAs and other discretionary structures.

In any young industry it takes a long time to develop the best way of doing things. That creates an opportunity for people who are prepared to invest some time and thinking around new concepts and ideas.

I feel that we’ve had some success in this area, albeit with limited resources. We’ve done well with the MDA structures we’ve built. We’re also looking at better uses of technology for compliance and paraplanning.

Every time there’s change and new rules, not only do we have to learn them but we have to make sure that our advisers know them and we give them the tools to comply – and then we have to supervise and monitor them. It can be very frustrating and difficult at times but there is no opportunity without problems.

Going back before the GFC, everyone that gave financial advice was deemed to be doing a reasonable job because everything you invested in went up in value. You didn’t have to be a great adviser or fund manager in order to generate good returns for your clients. It’s only when things started to get difficult that some advisers were shown up and opportunities arose for those who did their jobs well.

The industry is now moving in the right direction but we can’t afford to rest on our laurels or we will just stagnate and cease to progress. Our team is always challenging each other and trying to improve.We’re certainly always looking at ways to grow the business but in a very measured way – never at all costs and never if it means compromising on our standards of client service.

As well as my father’s advice, I’ve had the benefit of being mentored by some of our more experienced advisers. We try to impart some of the knowledge we’ve gained to our younger advisers as well. And I learn from them too. Many of our Millennial advisers have some really interesting initiatives like using YouTube videos to engage clients. This form of communication is perfectly natural to these ‘digital natives’.

Our mentoring is not always structured – it’s primarily about always being available to pass on my experience and what I have learned from others, in helping them improve their businesses and themselves professionally.

Ultimately, I think the keys to success in this industry are really listening to what your clients’ goals are, developing an understanding of what you’re good at and knowing when to bring in expertise to do the rest.

Consumers’ thoughts on Financial Advice

With the Royal Commission into Banking and Financial Services taking (only) a negative view on some of the primary providers of advice, there have been several recent attempts to garner the opinions of the average Australian consumer to determine what they think about financial advice in order to help bring a client-centric focus back to these examinations.

 The IFA and Momentum Intelligence (a highly regarded industry publishing house) have recently carried out Client Experience Surveys and, along with the recent release of ASIC Report 627 Financial advice: “What consumers really think”, each report seemingly espouses the value of advice and asserts a deep endorsement for the majority of the adviser community. The results have provided additional insights into Australians attitudes, perceptions and priorities in relation to financial advice.

 Advice Clients

The release of ASIC’s 627 Report highlighted that among Australians who had received professional financial advice, 89% intended to get advice again in the future.

The report also highlighted that almost four times as many Australians who received advice in the past 12 months had a ‘great deal of trust’ in their advisers compared to those people who had not received advice. This was mirrored in the IFA Client Experience Survey where Ninety-four per cent of the 1,008 Australians who currently engage a financial adviser, said they were satisfied with their financial adviser.

The ASIC report also highlighted that advised consumers are more engaged with their financial affairs, have higher incomes and levels of education. If their interaction with advisers has improved their financial behaviour, then that is another reason to seek advice.

When it comes to fees, around 50 per cent of advice clients have gaps in clarity on what their fees are paying for. Half of all advice clients surveyed said they “always” know what their fees are paying for, while the remaining 50 per cent have various levels of knowledge gaps around what their adviser fees can be

attributed to, with 35 per cent knowing “most of the time”, 3 per cent “about half the time”, 8 per cent “sometimes” and 3 per cent “never”.

The royal commission has dented client perceptions of the industry but not so much on their adviser. Three-quarters of advice clients said their perception of the financial planning industry have been impacted by the Hayne royal commission. However, only 28 per cent of advice clients said their perceptions of their adviser have been impacted by the royal commission.

Non-advice Clients

The Client Experience survey also explored the attitudes, perceptions and priorities of 311 Australians who do not currently engage a financial adviser.

It was found that most non-advised clients don’t completely understand the services advisers offer. Seventy-one per cent of non-advised clients had gaps in understanding what services advisers offer. Further, 56 per cent of non-advised clients agreed with the statement, “I am not sure how a financial adviser could help me”.

The other very important piece of information that Australian consumers provided in the ASIC research was that the main reason individuals did not obtain advice was that advice was too expensive. And yet the industry is about to have a reform agenda thrust upon it that will greatly increase costs to the consumer.

The Survey found that Fifty-five per cent of non-advised clients who previously had an adviser quoted “cost” as the reason for ceasing the engagement. In addition, 44 per cent of non-advised clients agreed with the statement “I cannot afford

the cost of a financial adviser”. However, the survey noted that the statement is contextual and respondents were not provided a cost to evaluate, which means that they are applying their own experiences and are potentially uninformed in how much it costs to engage an adviser. Other reasons cited included the performance of investment/financial products (38 per cent), communication skills (18 per cent) and technical skills (18 per cent).

The ASIC report indicated that there was significant mistrust of financial advisers, but that it was mainly prevalent among people who had never received financial advice.

The only conclusion that can be reached from this is that those people who don’t trust advisers have formed that opinion from statements by politicians and mainstream media coverage. It could not be from people who have received financial advice because the overwhelming majority of them were positive about their experiences with advisers.

The negative perception of financial advisers can also be attributed to lack of understanding. As the ASIC report acknowledged: “Even limited knowledge of recent reforms (e.g. the Future of Financial Advice (FOFA) reforms or the professional standards reforms for financial advisers) appeared to improve perceptions of the financial advice industry”.

These surveys have provided helpful insights into how, in the aftermath of the royal commission, financial advisers are still held in high regard. The surveys also give vital understandings on how advisers could further enhance the advice process by better understanding advice clients, and highlighting the expectation gaps of fees and services in the advisers’ offering.

The results of these examinations have had the effect of complimenting financial advisers, with the overwhelming majority of them seen to be acting in the best interests of their clients to improve their financial circumstances.

Lifespan scores triple win at 2019 IFA Excellence Awards

I am very pleased and proud to announce that Lifespan Financial Planning scored three gongs at the 2019 IFA Excellence Awards in Sydney last Friday, the 6th of September.

Our National Practice Manager, Michael Gershkov, the received Practice Management Consultant of the Year Award, while Prashant Nagarajan from Finnacle (one of our Victorian based advisers) won the Innovator of the Year Award. I was very honoured to win the Dealer Group Executive of the Year Award – an achievement only made possible due to the outstanding efforts of the Lifespan head office team, our incredible network of advisers and of course the unwaivering support of my wife Pamella. So thank you to all of you.

We also had a number of other Lifespan advisers nominated as finalists for awards including Gail Gadd, James McFall from Yield Financial Planning, Phillip Richards, Robert Rich & Glen Malkiewicz from Endorphin Wealth as well as Smart Home Deposit.

Michael was a worthy winner of the Practice Management Consultant of the Year category. Since joining Lifespan earlier this year, he has worked tirelessly to support our advisers. From helping them recruit and retain staff, to engaging with clients, build referral partnerships and find ways to improve efficiencies through technology. Michael has done a great job of partnering with our advisers for success.

The Innovator of the Year award was thoroughly deserved for Prashant, who has shown an incredible amount of initiative and creativity in incorporating digital solutions to enhance the efficiency of his business. See below for a very interesting summary from Prashant on his approach to digital innovation.

In 2020, we hope to assist more of our advisers to participate in the IFA Excellence Awards. The process is very rewarding and a terrific way to reflect on what you have done and articulate your value proposition. We will issue more information on how you can prepare your business for awards success in the near future.

Prashant Nagarajan from Finnacle – Innovator of the Year

“As a financial adviser and principal of a technology focused financial services business, I must always think about better ways of doing things, especially regarding the use of technology and automation in the advice delivery process. We have a number of practices within the business that are both innovative and demonstrate a new way to think about client engagement. We conduct our meetings via video conferencing to reduce wasted time and travel commitments for our clients. This also means we can service clients anywhere is Australia and around the world.

“We also write and draw throughout our meetings using new technology solutions, while sharing the screen with clients to create an interactive and highly informative experience. This also allows digital signatures and recordings to help with compliance and education for clients which can be reviewed and enjoyed anytime.

“We have created online data capture forms making the completion of important compliance steps easy and simple for our valued clients, and when submitted they are automatically emailed at the press of one button. We have found clients do not wish to deal with paperwork and at Finnacle, we have none!

“When it comes to marketing, technology has become our primary source of lead generation. This has been integrated with instant text notification when someone has submitted their contact details for one of our promotional campaigns so we can get in contact with them within minutes.

“Clients love our service offering which is based on a subscription model (similar to a phone plan) where ‘members’ choose the services or advice solutions they want plus they can pay for these via a monthly fee. We believe this is the new way of providing financial services, especially to the younger generations (who are our target market).

“With a team of four and a network of specialist referral partners to help clients, our innovations have created an improved low-cost business model coupled with significant financial gains now and down the pipeline. Process efficiency has resulted in very high customer satisfaction levels demonstrated in regular client surveys.

“Zoom meetings, online data capture and automated social media advertising have resulted in a more systemised way of doing business where leads are generated regularly, information is collected in a timely manner and we have many touch points with clients without them having to travel.

“Our business innovations have also helped with the satisfaction of our staff as they can work from home and in their own time frames. The continuous technology developments available to us ensures new innovations can overcome most issues we are faced with and what are problems for some advisers become opportunities for us. In turn, our business gains leverage by being a low cost, efficient solution which translates into a very affordable service for our Gen Y and Millennial clients.”

Lifespan Financial Planning throws weight behind advice industry fighting fund

Lifespan Financial Planning throws weight behind advice industry fighting fund

Lifespan Financial Planning, one of Australia’s largest privately-owned financial advice networks, has thrown its financial support behind the industry’s constitutional challenge to legislation to ban grandfathered commissions and encouraged its adviser network to do the same.

Lifespan has contributed $10,000 to the fighting fund set up by the Association of Independently Owned Financial Professionals to defend the property rights of financial advisers. Lifespan will top this up with a total of 50% of the individual contributions made by its 180-strong adviser network.

Lifespan founder and executive Chairman John Ardino said the legislation before the senate to abolish grandfathered commissions would increase the cost of receiving financial advice and lower consumer access to advice significantly when the opposite was needed.

“Our industry is at a critical crossroads. The outcome of this challenge in the High Court of Australia will affect the industry for years to come. We believe we should be doing as much as we can to ensure that outcome is a positive one for our clients, ordinary Australians who need access to advice for their wellbeing, as well as the advice industry which is being unfairly treated. The government adopted these flawed recommendations from the Hayne Royal Commission without any objective justification that grandfathered commissions have caused any harm to clients,”

he said.

Moreover, Ardino says “the commission’s recommendation to abolish Grandfathered Commissions is invalid because the commissioner failed to follow the directive in clause K of the terms of reference requiring consideration to be given to the impact of his recommendations on the economy, the cost and access to advice, competition and other factors.”

Mr Ardino added that grandfathered commissions involve no misconduct, no fees for no service and no breaches of professional standards or community expectations.

“Grandfathered commissions are legitimate income supported by the advice to the Labor government given by the Solicitor General in 2011, which Bill Shorten announced at that time. In effect, he said that these commissions constituted property rights protected by the constitution and that the government could only abolish them by compensating planners on just terms.

“The Government and Commissioner Hayne have falsely argued that this 2011 advice no longer applies. Moreover, there is a real risk that adviser property rights may be wiped out unilaterally by fund managers feeling obligated to stop paying grandfathered commissions, potentially in breach of their distribution agreements.

“Advisers may have to litigate against fund managers as well if it can be shown they acted improperly,”

Mr Ardino said.

Rethinking financial planning for Millennials

Rethinking financial planning for Millennials

Many financial advisers steer clear of younger clients in the belief that they don’t generally have much to invest and are too young to be interested in retirement planning.

However, the massive potential of this group cannot be ignored. The intergenerational transfer of wealth from Australian Baby Boomers to their children over the next 10 to 20 years has been estimated at up to $3 trillion.

And despite what some planners might think, there is a high earning Millennial cohort; the so-called HENRYs – high earners, not rich yet.

Some planners, many of them Millennials themselves, have structured their entire businesses around engaging this group. The strategy relies on the expectation that if these young clients are serviced in the way they want to be serviced, they will remain loyal to their planner until they hit their peak earning and investing years and beyond.

Much has been said, both positive and negative, about the defining characteristics of Millennials; those people born between 1981 and 1996. We’ve all heard the stories about how they are narcissistic and obsessed with fame, self-promotion and avocado on toast.

However, more positive traits attributed to this group include:

  • Tech savviness
  • Expert multi-taskers
  • Socially conscious
  • Information seekers
  • Scepticism about ‘big business’ – they appreciate ethics and transparency in marketing and don’t respond well to the ‘hard sell’.

So, what does all this mean for financial planners seeking to engage Millennials? One of Lifespan’s authorised representatives, Arkadiusz Bryl, founder of Real Knowledge, Diverse Solutions, is an expert at reaching younger clients through digital marketing. Arkadiusz regularly advises other planners on digital marketing and how to engage younger clients. He believes many financial planners overthink their approach to servicing younger clients.

“Ultimately, they want exactly what Generation X and Baby Boomer clients want, which is a secure financial future. They just want to go about it a different way.

“They might not want ongoing advice yet, but they do want help when major events occur in their lives such as getting married, having children and getting a promotion.”

Millennial’s do however seek complete transparency, in an age where you can find almost anything on the internet they appreciate when you lay everything out on the table and share or even involve them in the advice process.

As a licensee, I agree with Arkadiusz and can appreciate that traditional methods of engagement do not resonate well with Millennials and a different approach is required. Statistics show that more often than not, when an existing client’s wealth is transferred through a life event, the servicing adviser loses relevance and the beneficiary of the outcome will seek advice from somebody more attuned to their way of doing things.

Millennials are taking a greater interest in all things financial. They want to be well informed and are not afraid to seek assistance – but the engagement piece for most older advisers remains a challenge.

Where many firms get it wrong is believing that the service model needs to cost a lot of money. The broader adoption of many modern technologies means that the cost per client can come down significantly. Advisers need to accept that not every interaction has to come at a cost to the client.

What Millennials don’t want is to be told by an adviser, ‘come back when you have $200,000’. I guarantee you’ll never see them again if you take that approach.

A fresh approach to client engagement

The traditional approach to engaging clients just doesn’t work with Millennials. They don’t respond well to being told they should have particular investments or insurances. They want to be educated and make at least some of the decisions themselves. With that in mind, Arkadiusz begins his initial client meetings with a visual fact find.

It is a ‘no pitch, no sell’ proposition in which the prospective client is taken through a series of simple steps which shed light on their actual financial position. The simplicity of the process is also a pleasing contrast to the information overload that is so prevalent in modern society.

We took 120 people on a visual journey of their goals, needs and objectives by hosting an event where we provided everyone an empty “visual fact find” and I teamed up with an illustrator where we took everyone on a live journey on how to “smash goals, not avocados”. We provided no advice and 87 attendees left reviews that they learnt more about their financial life in 2 hours than in their whole life. Which made me think. Why can’t I do this on an even bigger scale.

The propensity for Millennials to educate themselves also makes content production crucial for advisers targeting this group. This might not be everyone’s cup of tea as it requires a significant time commitment. Arkadiusz has developed free ‘lunch and learn’ events in which he educates potential clients about developing a financial plan. He’s also created catchy titles around the content he produces such as “How to rob a bank without a gun”.

Millennials respond more positively to word-of-mouth endorsements than traditional advertising, therefore, social media is an ideal channel through which to engage them. Mass marketing through social media is also an effective way to keep costs down. For example, Arkadiusz posts videos to his audience of more than 1,000 Instagram followers every day, also often on weekends, and hosts a free group chat event online every week.

As I’ve mentioned, this business strategy would not suit most advisers, particularly those with no grasp of digital marketing.

Arkadiusz has few clients on retainer – he works with most of them on a transactional basis. His model relies on scale for its success. It also requires a constant flow of new content for social media feeds.

Critics might say that he is giving away too much of his time and intellectual property for free. But his response would be that by keeping them happy now, he is building a base of loyal clients who will be with him throughout their peak earning years and beyond.

Remember, the core values of Millennials are community focus and social responsibility – both in clear evidence here.

Rise of the Machines: AI for Financial Planners

Rise of the machines: AI for financial planners

The promises of radical business transformation have driven the inexorable rise of artificial intelligence (AI) in the financial planning industry over recent years.

The idea of having a machine that can continually learn on its own and identify and solve complex problems in a nanosecond is extremely alluring. But, the reality is that machines that can think like humans, but with millions of times more brainpower, are some years away yet.

While no one has yet to hit on the ideal AI model for financial planning, there are still a number of key areas in which the current iterations of AI are of enormous benefit to the industry. A 2018 global survey of 2,135 businesses by McKinsey & Co revealed that within the financial services industry, the top three business functions using AI were service operations (49%), risk management (40%) and sales and marketing (33%).

AI can seem incredibly daunting to the uninitiated, not to mention the fear that it could put planners out of work. But in reality, the opportunities far outnumber the threats. AI can both enhance a financial advice business’ service offering and help it to grow. Love it or loathe it, you can’t ignore it. Do so and you’ll be left behind.
So, what are the benefits and challenges of AI for financial planners?


Improved standard of client service

AI allows planners to spend more time servicing clients and adding to their value proposition by performing many of the mundane tasks that consume so much time. For example, AI applications can monitor client portfolios and send alerts when asset allocation changes or prices move outside of certain pre-set parameters

A planner might also use AI in client meetings to see various types of data and model potential outcomes of various investment options.

Cheaper and more efficient compliance function

AI allows planners to spend more time servicing clients and adding to their value proposition by performing many of the mundane tasks that consume so much time. For example, AI applications can monitor client portfolios and send alerts when asset allocation changes or prices move outside of certain pre-set parameters.

A planner might also use AI in client meetings to see various types of data and model potential outcomes of various investment options.

Cheaper and more efficient back-office function

AI can also improve efficiency in much of the back-office function. A number of fintechs are currently developing AI applications that can automate tasks such as compiling SOAs. At present they are best suited to the simpler SOAs and, even then, will generally require some human input.

The compliance function is another area where AI has huge potential for both planners and regulators, although it is still in the very early stages. As a licensee, I hope to see AI reduce compliance costs, which have blown out across the industry in recent years.

Lifespan is currently working with Kaplan on the development of its Red Marker Artemis software. Artemis uses AI to check compliance of written material with RG234.

The goal is to eventually be able to automatically run compliance checks on SOAs and other written representations as a starting point for humans to then use professional judgement on areas of concern. One of the challenges with supervision and monitoring is that 99% of what is reviewed is fine, however, AI can make zeroing in on the areas of concern much more efficient.

Nevertheless, having competent humans to then evaluate the possible risk and/or compliance breach and decide on a course of action is still critically important and I think we are a long way from having this replaced by AI.

  • Chat bots to answer general advice queries.
  • Fraud detection.
  • Client database analytics, providing valuable insights.
  • Algorithmic trading.

Effective way to reach Millenials

AI is potentially a good way to engage, or at least get a foot in the door with, the hard-to-reach under 40 demographic. Before you get too excited about the prospect of having a robot meet with your clients while you sit back and count the money, research shows that clients still value at least some face-to-face service from a human, even younger clients. A solution might be a combination of face-to-face service with AI taking care of the mundane back-office tasks.

This will undoubtedly change as AI becomes more intelligent, with greater deep learning/self-learning capabilities, and clients becoming more comfortable with technology handling their financial advice. Furthermore, with the industry professionalising and moving to a more user pays type structure, the cost of face to face advice is set to rise dramatically meaning that most consumers wont be able to access a live adviser and will have to settle for google or an AI for their advice.


Don’t throw out the baby with the bathwater

It is important to remember that AI is just a tool to enhance your client value proposition. It is a long way from being a viable alternative to face-to-face service. Nevertheless, its transformative potential should not be ignored.

It should work away in the background, freeing you up to spend more time on the functions that add value for your clients.

There is a risk of putting the cart before the horse and focusing on AI for investment insights, for example, instead of using it to gain a deeper level of understanding of a client’s situation in order to deliver more tailored advice.

AI is still unable to present a truly end-to-end bespoke advice solution to clients. There are too many nuances to each client’s individual circumstances. It’s important not to be distracted by the latest gimmicks or to rely too heavily on the data rather than the individual.

Regulatory challenges

One of the more interesting aspects of AI is how the latest developments can draw the ire of regulators, given that governments can be sometimes slow to respond to technological innovations such as AI. Don’t forget that most regulations were written and put in place long before AI came along.

Having said that, I believe the fintech community is working closely with ASIC and the government to make the implementation of AI in the advice industry as smooth as possible, which could result in changes or carveouts to regulation to help facilitate growth in this space.

Given how rapidly technology evolves, fintech development will be difficult to keep up with from a regulatory point of view, especially when client demand for tech-driven tools is increasing.

ASIC’s guidance on providing digital product advice in RG255 is too broad and does not cover all of the issues that arise in interactions between robots and clients. New guidance will most likely need to be drafted to address AI where it interacts directly with clients.

Incompatibility of systems

There are still issues with compatibility of systems. No one has yet worked out a way for all the different applications to talk to one another and seamlessly integrate. Long standing providers of both advice and product solutions will continue to have to wrestle with legacy issues and old systems.

Client bases are also extremely diverse, with many older clients still wanting face-to-face appointments and information in writing. In any event, new technologies will give rise to new services, new systems and new product options.

New technology is generally the focus of younger demographics, both as providers of solutions and as end users of the technology. AI will soon have a central role to play in the financial services industry and advisers should be open minded and prepared to explore the benefits that these technologies will bring.