Future of Financial Advice – Managing Investment Portfolios

2 Pages Posted: 8 Sep 2011

See all articles by Martin Hovey

Martin Hovey

UNE Business School

David Wysel

University of New England (Australia)

Date Written: September 7, 2011


The Minister for Financial Services and Superannuation has released the much awaited first tranche of the draft legislation of the Future of Financial Advice (FOFA) for public discussion and analysis. The first tranche of the legislation includes the ‘opt-in’ proposals, the ‘best interest’ duty and standard for advisers, and the increase in ASIC’s powers to enforce the new legislative elements. In this paper, the authors investigate the proposed ‘best interest’ duty standards and whether these will have any impact on the quality of portfolio management carried out by financial planners on behalf of their retail clients.

According to the Treasury Media Release No 127 of 29 August 2011, the principle guiding the best interest obligations for advisers is that 'the objectives, financial situation and needs of the client must be the paramount consideration when providing advice'. This duty includes various steps that the adviser must follow in acting in the best interest of clients. Further, these steps will be made consistent with the current ‘reasonable basis for advice’ provisions currently provided under the Corporations Act.

The authors are interested in determining whether the new ‘best interest’ duty for financial planners will translate into better portfolio management and, therefore, better performance outcomes for clients to compensate them for the likely additional costs of advice for those retail clients who seek financial advice from a financial planner.

Presently in the financial planning and investment industry, there is a wide range and variety of standards for reporting on investment portfolios to retail clients. The frequency may range from personalized, monthly updates for active, high net worth clients, to annual investment balance and transaction updates provided direct to the client by fund managers without any adviser input for which a trail or adviser fee is deducted from the client account (in addition to the investment manager’s fee).

There is anecdotal industry evidence which suggests that the active management processes of the Australian investment planning industry may not add any additional value to clients over and above fees charged. This line of argument is usually promoted by the direct investment industry and the ‘do-it yourself’ (DIY) investor. To counter this argument, the funds management industry has developed various investment styles and themes which suit certain asset classes in certain parts of the investment cycle. These investment styles usually do not outperform in all market conditions but never-the-less cater to the small account investor unaware of measures of risk such as (alpha) and (beta) and correlation of asset classes. The extant academic literature with regards to the management of portfolios, provides additional guidance as to what might be considered an optimal portfolio management strategy.

Managing investment portfolios for retail clients is a dynamic and flexible process where the skills of the planner are used in a systematic and structured way to achieve a consistent level of performance outcomes for the client. Actively managing an investment portfolio requires a high level of involvement by the financial planner supported by dealer information and material provided by the licensee. It remains to be seen which, if any, clients will pay for this under the new ‘best interest’ duty provisions.

Keywords: wealth, portfolio choice, investment decisions, financial institutions and services, government policy and regulation

JEL Classification: E210, G110, G280

Suggested Citation

Hovey, Martin T. and Wysel, David, Future of Financial Advice – Managing Investment Portfolios (September 7, 2011). Personal Finance & Investments (PF&I) 2011 Conference Paper, Available at SSRN: https://ssrn.com/abstract=1924026 or http://dx.doi.org/10.2139/ssrn.1924026

Martin T. Hovey (Contact Author)

UNE Business School ( email )

Armidale, NSW 2351

David Wysel

University of New England (Australia) ( email )

Armidale, New South Wales 2351

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