Ensuring that your advice business model is genuinely client-centric will become even more critical from 5 October 2021, when new Design and Distribution Obligations (DDO) comes into effect. This follows findings that complex product design and poor distribution practices have led to bad outcomes for consumers. Simply providing information does not always help clients make good financial decisions.
The Act is intended to:The implications of DDO will be far-reaching. On the surface, DDO can be seen as another compliance challenge. However, the scope of the change forces a re-think of how advice and investments are delivered. DDO represents a moment in time ripe for disruption, and therefore open to those with first-mover advantage.
The DDO rules place greater responsibility on all financial product issuers and distributors , such as financial advice firms, to ensure that consumers only invest in products that are consistent with their goals, financial situation and needs. All financial product issuers and distributors will also be required to have a framework that ensures the products' suitability for the end consumer.
The rules require product issuers to publish a Target Market Determination (TMD). The TMD will explain the type of customer the product is targeted towards so that the average person can understand. Advisers will not be able to recommend products that do not have a valid TMD to retail clients.
From an advice perspective, it is clear that a reliance on Risk Profiling as a means of directing investment advice and products will no longer be sufficient. A more genuinely client-centric approach is necessary.
How to comply
As highlighted above, DDO rules are intended to ensure that consumers only buy appropriate financial products that meet their needs and goals. Therefore, to match a product's TMD to an investor, the investor's needs musty be clearly defined.
Advisers need to develop a holistic view of the client's individual financial situation and future needs. Advisers who provide genuine Goals Based Advice are only part of the way there. Advisers that recommend investment products as a means to achieve the investor's goals need to be able to show how the selected products specifically meet those goals.
Many advisers currently use risk profiling as a part of their process - to understand the level of investment volatility the investor is willing to accept. But achieving investment goals is more than volatility or risk tolerance alone. More often financial goals will be the best determinant of the risk-adjusted returns required over specific timeframes.
Goals Based Investing is a simple and logical way to match financial goals to investments, and one used by institutional investors for decades. The challenge for advisers is that for retail investors and retail superannuation, the options are surprisingly limited.
The Dynamic Asset managed account solution does just that. It provides a range of goals based investment portfolios designed to match different client needs directly. To develop portfolios that meet different client goals, advisers can blend Dynamic’s goals based portfolios using a 'bucketing' approach, thereby matching the client's range of short and long-term goals precisely.
The Dynamic Asset approach is truly aligned with the intentions of DDO and provide advisers with a relatively simple way to achieve compliance.
Better still, embracing the Dynamic asset DDO solution is an opportunity to achieve what all great businesses do – work to directly meet their clients' needs.
To find out more about how Dynamic Asset can help your business mitigate the business risks that comes with DDO and capitalise on the market disruption opportunity, contact us today.