Select Asset Management chief risk officer David Yale said the industry’s new consumer protection standards have raised the bar for how financial planning licensees manage their risk of falling short of the new requirements.
The new regime “fundamentally alters the operating landscape”, according to Mr Yale.
“We see an emerging world where non-aligned advisers will seek to maintain greater control of client relationships and outcomes, but also limit downside business risk as it relates to complying with the new standards,” he said.
“So, there is a high degree of tension between those two ends of the advice business spectrum, particularly as the deadline for FOFA compliance begins officially on July 1.”
FOFA’s best interest test will pose questions around adviser research capability, real-time portfolio adjustment and scenario analysis, according to Mr Yale.
With a greater requirement to justify why particular investments are in a portfolio, this creates a greater need for research and analysis and to maintain “an informed asset allocation view”, Mr Yale said.
Advisers will also need to consider how they keep client positions consistent with this overarching asset allocation view over time, and be well placed to answer client questions around why a portfolio is best placed to meet their objectives.
“Such analysis requires the application of sophisticated scenario analysis and stress testing techniques,” Mr Yale said.
“And sitting across all of this is a requirement for risk management capability that efficiently identifies, monitors and manages key risks and any unexpected investment behaviour.”
Mr Yale said his group has developed an outsourced model, Customised Portfolio Solutions, that will help groups find a “better, compliant, risk-mitigated way to run client portfolios”.
The model helps advisers to tick the ‘best interest box’ knowing they comply with upcoming regulations, he added.
