What COVID-19 taught us about helping clients reach their OUTcomes

COVID-19 came out of nowhere and stopped the world. It stopped people going to work, going to visit friends and family, going on holiday, going out to eat and shopping for anything other than the essentials.

It stopped global trade and stopped many businesses and has lead to, what might be known in history, as the fastest rise in the unemployment rate the world has ever seen. It changed the behaviour of probably around a billion people overnight.

It almost stopped the financial markets. From the 20th of February to the 23rd of March many global equity markets, including the UK, the US, Europe, Australia and many others fell over 30% as investors sold everything they could and rushed for the door. As it stands, equity markets have recovered some of their losses, though some of us are still wondering what on earth is driving the equity market recovery if the full effects on the global economy are yet to be understood.

It begs the question, as an advisor, how on earth can you provide investment advice during something that is as unprecedented as this? The investment industry, almost as a single voice shouted to all their customers “stay the course, stay invested”

Everyone stood in hope that John Bogle (the founder of Vanguard and known as the father of index investing) was right when he said;

 “Stay the course. Regardless of what happens in the markets, stick to your investment programme. Changing your strategy at the wrong time can be the single most devastating mistake as an investor. Just ask any investor who moved a significant portion of their portfolio to cash during the depths of the global financial crisis of 2007-2008, only to miss out on a part of even all of the subsequent bull market”

It wasn’t until a meeting a few weeks ago, when the OUTvest actuarial team presented on the performance of our investment tracking system during the market crash that we suddenly realised that we were able to prove this advice is true for each client.

The 30% fall in equity markets did not have a major impact on clients achieving their objectives on our platform. In fact, it only affected 3% of our clients using our investment tracking system and tracking system told us why. 

The investment tracking system feature that anyone can use to help them keep their investments on track to achieve a forecasted target. About 21% of the investment goals on our platform currently use our investment tracking system at the moment.

Proportion of clients currently using the OUTvest investment tracking system

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Source: OUTvest

Investment tracking can be turned on or off at any time and recalculates the performance of the client’s investment against its forecasted outcome when the client logs in or changes their desired investment outcome, changes in the market value of the investment, changes in contributions or withdrawals.  It’s a real time system.

One of its most important features is its ability to understand why an investment is not on track to achieve the projected forecast, and this was key in helping understand why a sharp, relatively short-lived market crash did not push our clients off track.

Surprisingly enough the dominant reason why our clients are currently off-track to achieve their investment objectives is not related to the market crash in March. The major reason why 97% of our clients who use the system are off-track is as a result of their own actions, either early withdrawals, contribution changes, plan changes and the like.

Even more interesting is that the proportion of clients who are now off-track between February and April only increased by 3%, from 54% in February to 57% April, despite the market falls.

Change in the percentage of clients that are off-track to achieve their investment objectives between February and April 2020

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Source: OUTvest

The reason, in part, is because the investment return of every single investment contract is not the same. Every client invests a different amount at different times, and those with monthly contributions that are early in their investment journeys should care the least about market falls.

What we realised is that with advice technology like this we can assess the impact of market performance individually and provide individualised guidance to help them get back on track, and we can do this instantly. We are genuinely only now beginning to understand the power of these systems.

We also learnt that time-weighted returns is a useless method for any performance comparisons for an individual client. It’s a comparator designed to compare the returns of fund managers excluding cash flows, but cannot be used to assess whether a client will achieve their investment objectives.   Client experience the money-weighted return of their investment, this is the measurement of the return that gets them to where they want to go.

Reasons our clients are off track, taking into account the market crash over March 2020.

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Source: OUTvest

Clients want to meet savings goals not beat indexes

Moving to an outcomes-based investment approach is more than just about changing the investment product. It’s about linking the investment product and the client objectives, and the only way you can do this through regulated advice, whether direct to consumer or through a financial advisor.

Embedding digital advice systems into the process can be life changing for individuals trying to reach financial objectives. The investment plan becomes organic and flexible and linked more closely to the events in the life of the client, rather than an annual review meeting.

The same technology can also help advisors trying to scale their practice, reduce their cost burden and improving compliance whilst reducing administration burdens. It also means that the systems can support the advisors becoming much more proactive when it comes to support needed by clients. 

Read the original article as published in Finweek here

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