Bridge over ocean
22 October 2016 Multimedia

The Future of Investment Advice

  1. Anthony Serhan, CFA

The need and demand for attention toward the end client has never been higher. Investment advice is one of the high impact areas within financial services where this need has been growing. Is the “advice for a fee model” where the end customer decides the fee, the right model? What roles do technology and robo-advisory have to play? In this Take 15 interview, Anthony Serhan, managing director of the Asia Pacific Research Strategy at Morning Star, will provide his insights into these important questions that will shape the “future of investment advice.”

The Take 15 Series is a series of short interviews with leading practitioners on timely topics focused on the investment profession.


SHREENIVAS KUNTE, CFA: Hello viewers. My name is Shreenivas Kunte. I'm the director for Content CFA Institute in India. Welcome to this episode of Tech 15. Today we have with us Mr. Anthony Serhan. He is the Asia-Pacific Managing Director for Research Strategy at Morningstar. He's also the President for the CFA Society in Sydney. Thank you for joining us, Anthony

ANTHONY SERHAN, CFA: Great to be here.

SHREENIVAS KUNTE: Thank you. So we are going to talk today about the future of investment advice. And Anthony is going to give us his insights on the future of investment advice in the next 10 to 15 minutes. So Anthony just wanted to share, if you could share, what are the biggest changes you're seeing in the wealth management industry?

ANTHONY SERHAN: I think the biggest change has come from really a global trend of increased regulation and moving it towards more independence around the advice that needs to be given. And also, I think the other big-- the other two be things I would attach to that is the impact of technology, and lastly the move to for advisors to need to provide more holistic advice and not just where to put your money, or where to invest.

SHREENIVAS KUNTE: Right, so these three changes, the technological change, the regulatory change, and the role of the investment advisor, these changes-- what is driving these changes? Is it that the consumer has become more knowledgeable? What is at the heart of these changes?

ANTHONY SERHAN: Let me let me just address regulatory first, because I think there's two main drivers there. The first of those and foremost has been a lack of trust in an industry and the need to win back of trust following the financial crisis and some of the things that happened during that period, attached to the financial crisis. And you're also saying it's a world where politics is alive and well, isn't it? And regulators in government need to be shown to be decisive about these things. So it is misselling the products, it is bad practices out there, they need to address from a political perspective as well, and from that perspective. We want it to be addressed win back that trust.

And I think the other the other thing which I look at, a lot of the retirement, a lot of the pools of money that asset managers manage and that wealth advisors advise on have come through either compulsion or tax incentivize savings for retirement. And you think about that. The government sets up these incentives to create this retirement pool. Everybody knows that there's not going to be enough money to fund retirement in the future. So the government, they need to make sure that these systems are operating as efficiently as they can. I think that's another driver that's sort of pushing it through there. So that's led to some of this regulation.

And then, if you like, you have the technology piece coming in from the side. So this whole idea of disruptive technology. And in a way, the out workings of both of those things I think is what leads to this third element, which is the need for advisors to broaden the breadth of what they're offering.

SHREENIVAS KUNTE: Right, so you've touched upon again many important points, the first of them being trust, but before we go to trust, I wanted to understand how will the role of the investment advisor change?


SHREENIVAS KUNTE: And suppose somebody wanted to join the industry, what should that person be thinking about? And what about those who are already there in the industry. India, for instance, how should a new wealth management practitioner think about this?

ANTHONY SERHAN: I think if I was to simplify it, really, if you want to come into this industry, think of yourself more and more as a behavior coach. You've got to get that client. And you've not only got to create this investment solution, you have to coach that client towards an investment goal. You have to be much clearer about what the objectives are, work with them on how much they can save, that's important.


ANTHONY SERHAN: Work with them about how to prioritize their objectives. Talk to them about the estate planning, what's going to happen when they die, what sort of insurance they need. But also, more broadly, how to be disciplined enough to save to achieve those objectives, and keeping them on track when investment markets are going off track. Because that is one of the best ways to add value to a client.

SHREENIVAS KUNTE: You mentioned trust, so are these elements going into trust building? What are some of the principals or some of the learnings, if you could share, that can go into building trust that investment advisers can think about?

ANTHONY SERHAN: So I think first and foremost, an advisor needs to have a model that's free of conflict. So how you get paid is important as an adviser. Being able to explain that to a client and make them feel comfortable that they are getting unbiased advice about what you're doing for them is very important. And then, I think the other thing about trust is also being really clear at the start about what you are going to deliver. And what I mean by that is it's very easy to sell a dream that isn't deliverable, or to sell the latest, hot sector of the investment market, or the latest really cool thing. That's not necessarily going to win trust.

And certainly, when we look at firms that have been successful, they're the ones who just concentrate on the basics of how to build a portfolio, well diversified portfolios, and being clear with clients about the ups and downs, and what will happen about those portfolios. Of course, I come back to that idea, you want to be able to coach of your clients through tough times. And part of that is setting the expectations up front.

SHREENIVAS KUNTE: So do you think that the role of the investment adviser, I mean vis-a-vis, somebody like the investment banker in the financial services space, is a difficult role or the risk return tradeoff of a wealth management practitioner, is it a difficult one compared to others? How do you put that into perspective?

ANTHONY SERHAN: Is a difficult-- yeah, I do think it's a difficult job. You know why? For two reasons. You are dealing with things that are complex in nature.

SHREENIVAS KUNTE: That's right, yes.

ANTHONY SERHAN: And two, if you're doing your job well, you have to convince somebody to do things differently, to change their behavior. That's tough. That's tough, and lastly you know you want to be able to do this in a way that you're going to have a lifelong relationship with that person. A lot of other parts of our industry are very transactional. They're all about that point of sale, do the deal and move on. This, you're trying to create something much longer term in nature. So, yeah, it's a tougher role.

SHREENIVAS KUNTE: Right, so what are the-- on the challenging part of the role, it's a tougher role, but are there advantages? Maybe one of the advantages that you mentioned is that it's a life long relationship that you can build. Are there any advantages? And on a side portion, for a new wealth practitioner, does he take or does she take a couple of years to get established, what is the period before she can become a well established practitioner?

ANTHONY SERHAN: Well, that's a hard question.


ANTHONY SERHAN: It varies, but we just know two things about establishing your business. One is how many years of experience do you need before you can stop riding a bus. I'm a CFA charterholder I don't get my charter unless I got four years worth of experience.


ANTHONY SERHAN: At least four years, and that's the minimum level for you charter. Now to create a business, it's really dependent on the model, isn't it?


ANTHONY SERHAN: Do you have to go out and win clients? Are you starting in a company that already has clients? What's going to be your use of technology? There's many variables.

SHREENIVAS KUNTE: Yes. On the technology part, how do you see robo advisors? Do you recommend the robo advisors, the robo advisor model evolving? And how should the wealth practitioner embrace that evolution in technology?

ANTHONY SERHAN: So look, and I think this has been said many times, robo advisor is a bad term. But I will say is these robo advice platforms aren't the major threat to financial advisers. They are actually, I think, a great opportunity. So take a step back, a broader picture. A few important elements, one, the future of the advice is not just about face to face. It's not just about the telephone. It's not just about having a web site. It's about putting those things together. This idea of clients having a choice about how they access their advice, and their investments, and information about those. And having choice is a really big part of it. So technology is key to that.

Secondly, costs are coming down. So you have to be able to use technology to reduce the cost base of your business and still be able to work in a profitable way. That's just given across any industry. But increasingly, you will see in this market. And part of that I think is technology can be used to make financial planning practices much more efficient so they can serve more clients. I think what's exciting about that is the good advisors are going to be able to segment what they do using technology a lot more what they've done in the past. Then, if I can come back to the actual job of being an advisor, and you think about what technology can do, as I said, we need to do things much more holistically.

It's not just about here's a great-- I've done a risk profiling questionnaire, here's a portfolio, let's go invest in it, simple. No, as I said we want to be able to be a coach. We want to understand that. And in this world of big data, you can imagine just being able to-- if the client agrees, here's my bank account, here's some other transactional, here's a record of all of my past investments. And you have a computer that can analyze that information and actually automatically say, well, here are some of the problems with their spending, or do they save, don't they save. Here is what we've seen about the way they've handled their investments up to now and something that we need to identify. The algorithms are going to become much more--

SHREENIVAS KUNTE: Sophisticated.

ANTHONY SERHAN: Much more sophisticated, and importantly, it's going to help us give better advice and better guide people. But it's going to be a combination of both the technology--

SHREENIVAS KUNTE: And the coaching.

ANTHONY SERHAN: And the coaching, and being able to be there to take them through that.

SHREENIVAS KUNTE: Absolutely. So my last question, how do you, now as a role, Asia Pacific role, and moreover, a global role, you've looked at many different markets, which are the market which are very well oiled in terms of the wealth management investor, where the entire ecosystem is functioning better, compared to others.

ANTHONY SERHAN: That's a good question. So if I look around the market, so the better markets-- actually, can I say this first? No market is perfect. Every market has work to do. And within every market, there are segments, some segments are working very well, some segments aren't. But those that tend to be more ahead in terms of smooth, are those markets that have unbundled their fee structures, taken commissions out of products, for example, and actually going to more of a fee for services.

So you've got Australia, the UK, the Netherlands, those markets that have done that. In the US, I mean commissions are still allowed, but a large part of the money there is now moving towards more unbundled positions. And that's where you have seen the technological development. And these are also the markets I think where I've seen financial advisors really embracing the technology in the context of what they can deliver to their clients. So, there's a couple of really good spots.

SHREENIVAS KUNTE: So, no market is perfect. But in terms of the regulatory involvement, the evolution of the-- rather the evolution of the investment advisory model, would you like to then say that perhaps the UK or Australia, the have crossed the Rubicon so to speak.

ANTHONY SERHAN: There are certainly-- yes, I would say, and are certainly parts of the Australian market which I think are well ahead and have some fairly sophisticated models in terms of the way they're developing. We also see that in the US as well. But as what we've seen with all the concern over the DOL, the Department of Labor's rule around fiduciary duty in the US, there's a lot of concern there, which points to this idea. But there's still large parts of that market that do rely on commissions, the ability to sell commission-based products.

And I think the interesting thing-- and I'll you take the US for example, in some cases commissions can be OK. In terms of clients, they might be better off paying that upfront commission, as opposed to a higher ongoing expense ratio. Or the client might be OK with paying a commission as a way of paying their adviser. What's important is transparency.


ANTHONY SERHAN: And other thing which I've come to-- and if I can just talk about Asia for one moment, the reality is the mutual fund industry, as an example, within Asia, including India, accounts for a small, small part of the total wealth of investors across this region. Part of this comes back to trust.


ANTHONY SERHAN: And part of it comes back to the idea that we need to win that back, not only in terms of being able to trust an advisor, but being able to trust investment markets to deliver on long term goals. We just did a conference in Mumbai. Most of the advisors there feel that people are gradually moving away from physical assets, gold, property, towards financial assets. But it's still a small part. And that, if you talk about the future of finance, and the future of financial advice, the opportunity is to get a model and to do it so well, that we're actually going to grow the market, grow the market, and grow the amount of assets that we can serve, because we're doing a better job.

SHREENIVAS KUNTE: Right, excellent. Thank you very much Anthony.

ANTHONY SERHAN: My pleasure.

SHREENIVAS KUNTE: Thank you very much viewers of this episode of the Take 15 series.

NARRATOR: Copyright 2017, CFA Institute, all rights reserved. This program is designed to give accurate and authoritative information in regards to the subject matter covered. It is distributed with the understanding that CFA Institute is not engaged in rendering legal, accounting, tax, investment, or other expert advice. If legal advice or other expert assistance is required, the services of a competent professional should be sought.

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