By: Paul Nixon, Head of Technical Marketing and Behavioural Finance at Momentum Investments
Tools available to support advisers in shifting the conversation away from market benchmarks
The phased implementation of the Retail Distribution Review (RDR) is well underway in South Africa, with suitability of financial products to a customer’s needs remaining a core focal point. This means that the burden on financial advisers to recommend appropriate solutions for their clients’ investment objectives will continue to increase.
As such, Paul Nixon, Head of Technical Marketing and Behavioural Finance at Momentum Investments, believes that local financial advisers need to migrate away from a purely investment management approach, and embrace more of a financial coaching role, in order to survive in a post-RDR world.
“Picking funds based on historical performance or brand alone will no longer represent a rigorous enough process in solving for clients’ investment outcomes. Advisers will now need to demonstrate the delivery of suitable products and advice for each of their customers,” says Nixon.
In addition to ensuring suitability to customer needs, other RDR objectives include greater transparency and enhanced standards of professionalism in financial advice, he notes. “RDR aims to enable customers to understand and compare the nature, value and cost of advice and other services intermediaries provide, while building consumer confidence and trust.”
This, Nixon says, is essentially what Momentum’s outcome-based investing (OBI) score and toolset aims to do. “By providing a score out of 100 to assess a portfolio’s track record in delivering a stated investment objective, the OBI score assists advisers with all three of the above RDR objectives.
“It ensures that investment funds are suitable in terms of the client’s investment outcome; it enables customers to understand and compare funds in terms of their ability to reach their desired investment outcome; and it enhances the standards of professionalism in the industry by creating more consistent client outcomes,” he explains.
Nixon provides the example of a client walking into a practitioner’s office in Sandton or Sasolburg with the same investment need. “Regardless of location, the client will receive a similar solution set with the Momentum OBI score being the gold standard. This creates predictability and also enables us to create relevant communication and content for advisers to use when engaging with their clientele.”
This includes educating clients on their behavioural biases and ensuring they stay on track to reaching their investment goals, he says. “Clients need to understand that if their goals haven’t changed, neither should their investment strategy. This is why investment management decisions should be left to fund managers, and if there is enough reason to change strategy, it should be done at a fund level by the associated professionals.
The Momentum OBI tools compare a portfolio to all other registered portfolios in South Africa and provide visual evidence that supports the adviser in moving the conversation away from market benchmarks. This ultimately empowers advisers to talk to their clients about the things that really matter, in terms of RDR regulations,” he explains.
Interestingly, Nixon notes that the shift in consumer needs is very much overlapping this legislative requirement and may have an even bigger impact on practitioners who are slow to adapt. “Customers are more educated and more aware of fees and are even exploring alternative distribution channels and advice models.
“The value of financial advice will therefore be defined by the depth of the relationship and support that an adviser will give to a client. This change in value proposition represents a significant paradigm shift and requires meaningful support from the industry players and learning the requisite skills to practice in this new environment. We believe that the Momentum OBI score and toolset will play a pivotal role in providing this support,” he concludes.