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October 2018 - Knowing your client is proving to be good for the advisor's business!

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FinaMetrica and PlanPlus Global

October Client Bulletin

Every day advisors make critical evaluations, judgements and decisions in areas where there are no specific rules to follow. 'What's best?' is the question we try to answer this month as we do a 'deep-dive' into the research around risk profiles, asset allocation and why really knowing your client is proving to be good for the advisor's business!

 

Nicki Potts, SVP Product Development

Be Careful Measuring Relative Risk Tolerance
 

Pyschometric testing is considered the 'gold standard' for measuring financial risk tolerance. But some people use an economic measure, such as gains and losses from a gamble. John Grable, from the University of Georgia, recently presented his research comparing these two methods to the FPA conference, reporting that pyschometrics provides more insights to investor behaviour than gamble-based measures.

 

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How Do You Balance Risk Profile Trade-offs?

 

Every advisor knows the juggling act of trying to balance risk tolerance, capacity and need against the investor's timeline, experience and composure. But there is no agreed standard on how to juggle those factors. How to rank and then balance these factors is the focus of intriguing new research by PlanPlus founder Shawn Brayman. Planners' critical issues are to have a documented approach, share it with clients to obtain their informed consent – and use it consistently, rather than treating each case individually.

 

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Profile To Portfolio – Which Map To Follow? 

 

A client's risk profile must inform, and shape, the investment recommendation that will be made by the advisor. There are several approaches to mapping a direct link from risk profile, including volatility and value at risk. But there is no agreement over which is the best basis for discussing risk with clients. This research explores the different mapping methodologies.

 

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Profit From Really 'Knowing Your Client' 

 

Financial advisors who engage in leading 'know your client' behaviours see 72% higher net client growth and 56% more of their clients are very willing to recommend their services to family and friends, says the benchmarking study from an international coalition of advice-related entities, including the Association of Financial Advisors (AFA). Meanwhile, advisors with a know-the-client focus use the trust in the relationship to spend more time with partners and adult children and are also more likely to discuss aging-related lifestyle issues and cognitive decline.

 

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Advisors Can Add 3% p.a. Value For Investors 

 

Advisors can add up to 3% to returns for investors across seven key areas, according to research from Vanguard. Every factor won't be in play every year: they include asset allocation; expenses; rebalancing; behavioural coaching and withdrawal strategies.

 

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Goals-based Planning Needn't Be Hard Or Expensive 

 

Some advisors believe it is too complicated, or expensive, to give goals-based advice. But with the right technology, and with a very good knowledge of the customers, advisors can use a goal-focus to attract and retain clients. In these situations, goals become the starting-point for conversations that uncover what is possible and reveal new 'what-if' scenarios.

 

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How Social Factors Influence Asset Allocation 

 

PlanPlus recently sponsored an award for the Best Paper in Behavioural Finance that was won by research examining how social factors impact investment decisions. The most important factors (in order) are household peer effects, personal characteristics and workplace peer effects. Neighbourhood peer effects and financial advice play a less important role.

 

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Research Award For PlanPlus People 

 

The Academy of Financial Services has given its prestigious Award for Best Retirement Planning Research to PlanPlus founder Shawn Brayman and his co-author Larry Frank Sr. Their paper Combining Stochastic Simulations and Actuarial Withdrawals into One Model is published in the November Journal of Financial Planning.

 

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