The Value of Financial Advice: How Morningstar is Leveraging Data and Research to Better Serve Advisers

Jamie Wickham  |   01st Apr 2022  |   6 min read

Advice is evolving at a rapid pace—shifting from a world of product distribution to true client-centric advice. Today, the conversation is focused on the clients’ goals and aspirations. Advisers will spend less time selecting products and building portfolios and more time supporting their clients through the inevitable ups and downs of markets, helping them stay the course to meet their goals.

At the same time, technology and the new world of digital experiences has raised the bar for all products and services in our everyday lives. Seamless and real-time is the new normal. We expect our technology to be frictionless, accessible and personalised. These attributes are no longer associated with innovative, cutting-edge solutions—they’re expected. Think back to the last time your smart phone froze, the app crashed, or your connection dropped out—zero tolerance!

Technology for advisers and their clients should be no different. Advisers are dealing with peoples’ financial circumstances and the lifestyle it affords them. The experience advisers deliver for their clients must be personalised relative to their situations and financial goals. Morningstar’s research shows that behavioural coaching and interventions can add the most adviser gamma (Morningstar’s measure of the value of financial advice).

Data + Behavioural Science = Personalisation

The key to personalisation is the intersection between data and behavioral science!

Data will do more of the heavy lifting as it relates to understanding advisers’ clients. It will inform more of what advisers know about them—tolerance for risk, household consumption and spending habits, identifying life events and most importantly, the likelihood of reaching their goals. A client’s access to their data and the availability and transparency of data for their advisers—client portfolio data, banking transactional and credit card data—via the Open Banking initiative, and investment product and securities data, is ever increasing.

Rather than relying on clients’ self-perception of how they might behave during a market correction, behavioural research algorithms applied to available data will give advisers a far more accurate picture of what they’re likely to do. This enables advisers, as the coaches, to better prepare for and manage them through the tough times. Research tells us that people are poor predictors of their own behaviour and perception is quite different to reality. Data will do a better job of telling us the real story with the aim of improving the probability of clients reaching their goals whilst being able to sleep at night.

Risk and Goals

Take the assessment of risk as an example. We all know the problems with risk tolerance questionnaires—most clients don’t really understand risk. They often say they have a higher risk tolerance than they demonstrate when the market drops; and the same risk tolerance is applied to all goals regardless of time horizon and priorities.

Morningstar’s behavioural team has been in the lab researching new ways to assess risk in a goals-based planning framework. The framework considers the required return to achieve the clients’ goals along with their sensitivity to volatility and time horizon. Simulated test drives in a client-facing app can measure client sensitivity to portfolio volatility. And historical trading patterns relative to market conditions can reveal more about the clients’ behavioural biases; how have they reacted in the past when the market turned down—did they offload their portfolio?

It is early days in our development, but it has the potential to be a more personalised, multi-dimensional risk profile that can better balance risk capacity, volatility risk, shortfall risk and client behavioural tendencies. The potential for the adviser to improve their clients long-term goal achievement is significant.

This is a follow-up to earlier work from the same behavioural team on “Mining for Goals”. The aim of the study was to get to the bottom of investors “real” goals—how behavioural biases can cause investors to overlook important financial goals. This work is a practical guide to help the adviser crystalise client goals and narrow down their needs.

Bringing the User Experience to Life in Software

The next wave of software innovation will better support how advisers engage and wrap a service model around the advice they deliver. The combination of data and behavioural science will be foundational to the way in which software is developed. How it is incorporated into the user experience and advice workflow will be critical to delivering great outcomes for advisers’ clients; and facilitating advice that is compliant and high quality.

Our acquisition of AdviserLogic brings together Morningstar’s data, research and behavioural expertise and AdviserLogic’s award-winning financial planning software solution for advisers.

Our combined software, design and user experience teams are focused on elevating our software solutions for advisers with all the capabilities at our disposal. A belief in the value of financial advice and investor-centric mission will guide our product development and service model. Our commitment is to find new and compelling ways to support advisers and the clients they serve.


Originally posted 2019-12-19 10:54:57.

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