Data and advice – the winning combination

We are, perhaps, getting to the point where we may start taking the power of data for granted. But it’s important to reflect on the ways data really has changed our world – and the ways Financial Advisors give advice.

The data we use today is reliable and robust. It brings evidence, confidence, predictability and accountability to decision-making. Naturally, that makes it a focus area for the FCA. They’ve regularly flagged concerns around unsuitable advice, scrutinising how advisors analyse clients’ goals and make recommendations – see the ‘Dear CEO’ letter at the start of 2020 and the Assessing Suitability Review 2, which the FCA hopes to resume next year. That means it’s vital that Financial Advisors understand, and have confidence in, the data, methods and frameworks they use to make decisions.

Cloud busting

Cloud computing has transformed the design of investment solutions, bringing complex and cost-effective analysis to the retail market. For example, at Hymans Robertson we traditionally used our Economic Scenario Service for complex investment strategy reviews for large pension schemes or insurers. Now we use it on a completely different scale to understand portfolio risk and return.

Enhanced computing power and access to new datasets mean we can characterise even more asset classes to understand correlation and diversification. We can position individual client goals in the broadest economic context, combining cashflow modelling with expected portfolio behaviour. And we can assess a much larger pool of portfolios – typically in the region of 200,000.

As well as traditional metrics like return and volatility, this ‘balanced scorecard' approach looks at outcome-focused measures like the probability of achieving goals or the impact of severe downside risk. This creates resilient solutions to meet actual goals, rather than targeting abstract returns; it’s solutions focused on outcomes.

Rich insight for risk

The regulator is increasingly keen that advisors demonstrate the suitability of their advice at individual client level. We can do this by applying institutional analysis techniques in retail settings. If the same set of underlying economic projections that was used to create the investment solution is then used to assess individdual suitability, we have consistency. Data brings rich insight, down to individual postcode level, so advisors can now objectively measure things like longevity. Together with the client fact-find and cash-flow modelling, this brings a detailed understanding of risk and potential return – and crucially, demonstrate sustainability of advice.

Remember the goal

Helping clients understand their future goals can change behaviour. For example, understanding how much income can be sustainably taken from their pot often ‘nudges’ behaviour change – for example, someone might then change the amount they save, amend their retirement timeframe or revise their expectations for their retirement lifestyle. Our Sustainable Income Tool brings this to life by empowering advisers to model sustainable withdrawal amounts for their client’s drawdown pots, allowing them to test the interaction of different income terms, withdrawal levels and investment solutions. As conditions change over time they can use the system to monitor progress and adjust the plan if it goes off-track.