Knee-jerk.

The word conjures up scenarios where impulsive, hasty, irrational decisions were made, often without taking the holistic picture into consideration. It’s an action that can lead to disaster.

In the world of financial advice, it is the equivalent of a four-letter swear word.

Research by Barclays from late last year shows that half of the investors surveyed admit to making impulsive investment decisions, with two thirds of those respondents then later going on to regret that decision.

The study shows that the top three triggers for these investment decisions are social media (32%), influence from friends (31%) and, perhaps the most disconcerting, the fear of missing out (30%), think Bitcoin.

Whether we want to admit it or not, it seems it might be a good idea to have someone in place to act as a knee jerk counterweight. Someone to stand in that gap and talk us off the edge when all rational thought departs upon hearing about the latest COVID-variant or Baltic conflict.

Because let’s face it, the world is messy now and volatility is everywhere. A look at the CBOE Volatility Index, or VIX as it is better known, shows that the actual level of volatility that we are currently seeing is unsurpassed, with maintained levels in the high 20s and hovering for longer periods near 40. The index attempts to measure the magnitude of S&P 500 movements. If the swings in price are more pronounced, the higher the level of volatility.

At INN8 we have always been inspired by the wealth managers of the future – those financial visionaries who guide clients through new and uncertain times and act as trusted partners when things get hairy.

And this is where the real value of advice can reside – in those times where the adviser not only proactively manages their client’s assets, but when they also understand their clients well enough to proactively manage their financial behaviour as well.

Financial advice – Level: Intergenerational coach

INN8’s Georgina Smith, Head of Distribution Investment Platform, argues the contrary.

“There are certain things robo-advisers simply cannot do. Real value is unlocked when you build a relationship of trust with an adviser who proactively manages your behaviour; where there is a behavioural coaching relationship,” she says.

A 2021 study by Vanguard supports this argument. The perceived value-add to annual performance for human advice was higher than that for digital-only advice. More than 90% of human-advised clients also said they would not consider switching to digital, while 88% of robo-advised clients said that they would consider moving to a human adviser in future.

Smith states that advisers need to claim their space as intergenerational financial planners and financial behaviour coaches and assist clients in navigating their way through the murky waters of our high volatility and black swan-prone reality.

Open communication and unlocking of insight – it’s a two-way street

“As a client, you know you are with the wrong adviser when you are  filled with anxiety, due to a lack of information and constantly logging into your portfolio to see what is going on,” says Smith.

The communication channels between adviser and client should be open, with the adviser coaching and guiding their client through market shocks and changes in legislation. Advisers should get on the front foot, reaching out even before the client phones and asks what they should do in a specific situation. By then, says Smith,  they’ve usually already had at least one sleepless night. “It’s easy to plan to do this type of communication around events like the budget speech, but it’s also important to remember to trigger a message to clients for unusual events, which there seem to be more and more of lately,” she says.

“If you read the news and hear about a market event of some kind and you don’t get a communication from your adviser that provides insight or reassurance – that situation is not ideal,” she says.

It must be a two-way street, however. No adviser will be able to provide bespoke and relevant advice for a client’s unique situation, unless the client shares his or her reality with the adviser. The readiness of a client to disclose their reality will depend on how much they trust their adviser and how much value they perceive they will gain by sharing such information.

“It should be an informed partnership – the more you share the more they will be able to provide you with the nuanced advice that you need.”

Hyperpersonalisation in approach

Deloitte calls it “connecting with meaning” in their white paper on the topic.

Using data and insights to approach a specific client in a specific way can add incredible value to the relationship and improve the outcomes for your clients.

However,  McKinsey warns it could also go horribly awry if you get it wrong. In its Next in Personalisation report, released last year, it says: “Seventy-one percent of consumers expect companies to deliver personalized interactions. And seventy-six percent get frustrated when this doesn’t happen.”

The bottom line is that non-personalised communication or interaction poses a significant risk in a low-loyalty environment.

“If you are not being managed by your adviser as an individual, but rather in a group with the same risk rating, the you are with the wrong adviser,” says Smith.

In an article in IFA Magazine, CEO of Visible Capital is quoted as saying that firms that can utilise their data and tech effectively to create personalised experiences can get fixed multiples of between 6.5 to 8 times profit, compared to the 5 by companies that don’t invest in managing their data assets.

Financial planning and an ecosystem approach

“As you grow your wealth, one of your first needs may well be protection of that, or your family’s assets, and therefore the first experience often comes in the insurance sphere,” she says. “However, you should not fall into the habit of simply going back to that product provider as your wealth grows. The real value in advice is found when your engagements with a financial adviser moves away from the individual parts of your financial world towards the ecosystem of your finances and wealth.”

Many financial institutions have moved towards an ecosystem approach, providing a full spectrum of services and focusing on the individual client’s goal-based financial needs. Advice needs to follow through a behavioural coaching approach, acting as a trusted partner on the financial journey. A small element of that will be to suggest products such as investments or to advise on tax efficiency, but the vast majority of value will be added through scenario planning with the client. It comes down to helping the client think through the ramifications of how the behaviour they exhibit, will affect them and their family in the years to come.

Future of advisory services

In South Africa, for example, the Gordon Institute of Business Science offers a short course in behavioural finance for investment decisions and the University of Cape Town recently invited applications for a fellowship in behavioural finance and financial planning.

“There are already some brilliant financial planners out there who have been practising the art of financial coaching for years and they are driving the professionalisation of the industry by modelling and sharing insights into best practice. For many, it’s a different way of showing up, the difference between being an adviser, who is simply trying to pick the most appropriate funds, to being a trusted partner with a duty of care to the client. Once a client experiences that, there is no turning back,” says Smith.