A new alliance for the post-Royal Commission world
Originally published on Financial Standard Advice on 21 August 2018
The hearings held as part of the Financial Services Royal Commission in the first half of 2018 will almost certainly prove to be a watershed moment for the financial advice industry.
As the expectations of the community, and by extension regulators, have shifted dramatically, advisers will face more intense scrutiny as to how they make decisions
Already, advisory groups are reviewing their investment decision making process. As they do so, the expanding role of external asset consultants is being reconsidered.
Investment consultants have typically been relied upon by advisers to review and select fund managers. But in this new era where independent non-conflicted advice has become more valued, consultants are becoming more important strategic partners.
Adviser groups are considering two options when it comes to external investment consultants. Some are opting for a totally outsourced model in which consultants run the portfolios and strategy, covering asset allocation, manager selection, currency exposure, the investment committee and reporting.
Other groups are opting for a hybrid model in which consultants provide independence, and alternative views to an internal investment team.
In this case, consultants are becoming an extension to the team via a partnership in which close ties are established between advisers and the consultants.
The partnership allows advisers and investment committees to back up their decisions with research, analysis and evidence-based decisions that enhance independence.
It's not just clients and regulators that want to see evidence of sound, well thought out investment decision making.
The PI insurers wary of rising litigation risk are gaining comfort from advisers that are "disciplined, documented investment process" will potentially reward advisory firms through lower premiums.
PI insurance is designed to cover breaches of professional duty, not investment losses. But John Kelly of MKM Partners, of Australia's leading specialist insurance firms says a significant amount of investment risk can be "mitigated by appointing well resourced consultants with clear investment guidelines."
Another emerging trend among advisers keen to improve their investment decision making process is to call on consultants for more holistic and strategic advice.
The better investment consultants are moving beyond fund manager selection recommendations and providing strategic tailored advice on asset allocation, currency hedging and investment committee support.
This is fostering a deeper and more dynamic engagement with advisers in building or enhancing the investment decision making process.
Finally, there is a growing appreciation among advisers, particularly those looking to build scale by taking on more clients, of the time and cost burden involved in making investment decisions.
The less time advisers spend on worrying making or changing investment decisions, the more they can focus on building deeper client relationships, meeting the increased regulatory demands and building scale in their practice.
To that end, high quality investment consultants are likely to prove valuable partners to advisers that are both ambitious and committed to providing their clients with the best possible outcome.
Robert Talevski is founder and managing director of Activus Investment Advisors, providing investment consulting and portfolio management services to advisers, superannuation funds, institutional investors and NFPs.