By: Paul Nixon, head of technical marketing and behavioural finance at Momentum Investments

Ironing out the inconsistencies prone to professional services

There is little doubt of the value that financial advisers add in getting clients to accumulate, protect and ultimately distribute their wealth. However, financial planning is a professional service just like medicine and law. And professional services involve judgement, which by its nature will be affected by inconsistencies.

This is according to Paul Nixon, head of technical marketing and behavioural finance at Momentum Investments, speaking in light of the new partnership between Momentum Investments, the prestigious Oxford Risk in the UK and The Financial Planning Institute of Southern Africa (FPI) to shed light on inconsistencies in the advice process.

“Humans are prone to ‘noisy’ errors – unduly influenced by irrelevant factors, such as their current mood, the time since their last meal, and the weather. This chance variability of decisions is called ‘noise’. Noise is negative both from an advice and an investment management perspective – particularly when you are focused on delivering the best possible solution for clients’ needs,” notes Nixon.

The aim of this partnership says Nixon, is to limit the ‘noisy errors’ by highlighting the inconsistencies in the advice process and working together with financial planners and industry experts to provide some guidance and to ultimately, provide more consistent advice.  “Think of a crucial part in the advice process like identifying a suitable “risk tolerance” for the client. This is a complex construct and many of us come with many preconceived ideas of what this means. What makes this even trickier is that this sometimes changes over time. This is one of many examples and to investigate this further, we’ll undertake a formal study that is CPD accredited which will give recommendations on how the industry can ultimately create even more value for clients.”  

According to Anton Swanepoel, acting Head of Financial Planning at Momentum Financial Planning, all investors will benefit from a better understanding of the balance between their required investment returns and the risk that they would need to take to achieve their objectives. It is very easy for clients to forget what they want to achieve when market movements and volatility only puts the focus on risk.

As an industry we should do everything in our power to assist investors to manage emotional responses to their investments better to ensure better outcomes.

Momentum Investments are pioneers in South Africa with their outcome-based investing (OBI) philosophy that strives to create repeatable and consequently more predictable investment outcomes for clients, but Nixon adds that noisy errors could create inconsistent results. 

“OBI is only half of the equation – more consistent investment outcomes paired with inconsistent advice due to ‘noise’ may still lead to a variable client experience,” explains Nixon.

According to Greg Davies, global expert in applied decision science at Oxford Risk, the most suitable investment solution for a client should differ based on the client circumstances it’s recommended for, not the financial adviser that’s recommending it. “The two main sources of inconsistency in advisory processes are an overreliance on humans and the heavily front-loaded nature of suitability assessments.”

“Establishing frameworks to drive consistency in diagnosing situations doesn’t mean giving every client the same answer. It means those answers need to be within boundaries defined by a clear diagnosis of the problem. There are multiple paths towards remedying any situation, depending on client personality, circumstances, and engagement.”

Davies believes identifying noise isn’t about eradicating inconsistencies. “It’s about eradicating unjustifiable ones and evidencing justifiable ones. Consistency of financial advice is a crucial concern, especially when we remember that advice isn’t a single event, but an ongoing relationship and that the regulations care not whether you get it right on average, but whether you get it right for each individual,” he adds.

David Kop, director of relevance at the Financial Planning Institute (FPI), says in the information age the value of advice has shifted from a transactional relationship of choosing the best product to a long-term relationship where the financial planner acts as a coach and mentor.  

“For a financial planner to remain relevant in the future, they need to upgrade their human and technological skill sets. To devote time to the important role of behavioural coaching the financial planner will need to employ technology to perform routine tasks, use their technical skills to blend the results from the technology to a plan, and their human skills to help clients make the right decisions,” says Kop.

The FPI, as part of the global financial planning profession through the Financial Planning Standards Board, is in the process of updating the Financial Planner competency profile to ensure that the profession remains relevant in the future. “Studies such as this will only enhance our understanding of client behaviours, and how best we as financial planners can serve our clients,” concludes Kop.