Investment advice following the 4-pillar-principle
Advisory approaches for a digitally supported investment advice
Introduction
Investing on financial markets is a complex issue per se, that requires knowledge of the features of financial products, interest of market participants and is influenced by economic and many other factors. Therefore, the following question arises: which investment advice approach offers the investment service provider the opportunity to break down the complexity and to offer a guided and understandable process for the wider audience and a high-qualitative advice services to the investor?
In this article, we would like to elaborate on investment advice that follows the 4-pillar principle. This places the client and their targets in the centre. Due to the digital support, it offers a transparent, comprehensible advisory process that has proven to be effective.
The investor at the centre of the advisory process
In the advisory meeting the client not only has a financial demand but also a current situation and disposition. The very same investor can e.g. be very cheerful, seem depressed or seem to their thoughts elsewhere. How does this realisation help us and how does the 4-pillar principle support the advisor with different dispositions of the investor in the advisory meeting?
Global tendency with positive emotions
From emotion research findings it is known from that people who have a positive mindset, take a global view and tend to be more decisive. Applied to an advisory meeting this means, that advisors should avoid details and instead focus on general key figures and analysis and then seek a conclusion. For this purpose, the 4-pillar system offers the right basis by analysing the investments using four easily comprehensible questions.
Strong arguments are only demanded with familiar topics
Studies and models of persuasion show, that people are often convinced by weak arguments. Typically, this occurs because they do not have the time or motivation to deal with the topic in depth or because they trust their advisor. This means that the advisor should refrain from excessive explanations provided that they are not claimed. The 4-pillar principle demonstrates how one can advise a client in a transparent, comprehensive way and in conformity with the regulatory requirements without getting lost in detail.
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Elaborating on risks and chances in the client meeting
An overview of the 4-pillar principle
The 4-pillar principle is based on 4 main questions that guide the advisor and the client through the advisory process. They inform the investor about existing investments and illustrate how an investment proposal may improve the current situation in the future. The questions are easily understandable and consider 1) the individual situation of the investor, 2) the profit and loss possibilities that exist with the investment, 3) the personal investment targets of the investor and 4) also show how the assets would develop in rough times on the financial markets.
Is the portfolio right for me?
A portfolio matches an investor when their personal investor profile, consisting of knowledge and experiences, financial situation, investment target and personal restrictions, is consistent with the investments. In a software solution one can automatically compare the investor’s profile with the investment proposal.
UnRisk Omega’s digital investment solution WEALTH uses the digitally generated investor profile, comprising customer segments ,risk profile, knowledge and experiences, in combination with the financial services and investment strategies of the portfolio to assess the problem. Through the automated assessment, both within portfolio reviews as well as with reallocation proposals, the answer to the questions of the first pillar are immediately available to the advisor. These questions are:
- Does the investor understand the investments and are they consistent with their experience?
- Considering their financial situation can the investor bear the financial risk of the investment?
- Have the agreed strategies and thereby the investment targets of the investor been reflected upon?
- Have the preferences and restrictions voiced by the investor been considered?
- Have all bank internal investment guidelines been complied with?
If all question can be answered positively, the portfolio or the investment proposal matches the investor. Otherwise the advisor receives clear action instructions which they address together with the investor.
Which returns can I expect, and which risks exist?
A connection exists between risk and return: the higher the portfolio risk, the higher the expected return. The risk-return analysis of the second pillar, offers an easily explainable, visual representation for the advisor. This graphically shows where a portfolio is situated on the risk-return range and adds selected indices as orientation guide.
The complex topic can be explained in two ways: the advisor can, on the one hand, to show the fair positioning of the portfolio (which exists as the portfolio is above the line), draw a supporting line between the top right and the bottom left benchmark indices. On the other hand, the advisor can explain the position of the portfolio in relation to a displayed index, e.g. the share index. Based on the share index the advisor could explain the position of the portfolio in the following way: «the portfolio is half as risky as the share index, with a return expectation of 2/3 compared to the share index».
Can I achieve my investment targets with the portfolio?
A portfolio is subject to fluctuations in value which can be extrapolated into the future. Thus, it can be illustrated within which bandwidths a portfolio might develop. Using this simulation technique one-off or regular monetary in and outflows, specific investment target (e.g. purchasing a house) or also crisis on the financial markets, can also be taken into account.
The digital investment solution of UnRiskOmega offers this solution. Together with the investor the advisor can collect individual investment targets and address the probability of achieving these with the existing portfolio or investment proposal. Moreover, it is also possible, and is particularly interesting for clients over 50, to visualise a wealth development beyond retiring. For this, phases of wealth accumulation with riskier investment strategies followed by phases of asset consumption can be simulated. This figure reveals to the investor how their wealth may develop beyond retirement.
How does my portfolio react, when the markets act up?
Scenarios and stress tests help to assess the behaviour of a portfolio during turbulent times. Scenarios can refer to past situations or represent a latent market risk. The former offers the advantage that the investors remember an event and can thus establish a link to possible impacts for themselves more easily. Latter, on the contrary, offers the opportunity to regard potential future market situations and to position oneself in accordance with one’s own assessment of the probability of the scenario.
UnRiskOmega’s digital investment solution offers the opportunity to install different, freely definable scenarios. These can be discussed during portfolio reviews or reallocation proposals together with the investor. The analysis of scenarios offers an easy opportunity for the advisor to demonstrate the risks during turbulent times but also during relaxation scenarios on the financial markets to the investor. Thus, an investment solution that matches the investor’s subjective risk appetite can be found.
Conclusion
The 4-pillar principle is a simple and comprehensive advice approach which supports the advisor during the advisory meetings with the individual investor. It focuses on the investor with their individual financial situation, their existing knowledge and experiences, their specific needs but also their uncertainties. At the same time, the advisory approach considers the regulation requirements during the process by e.g. considering the required suitability tests.
The advice approach can be fully digitalised with the 4-pillar approach thanks to today’s technical possibilities. Individual pillars can be visualised and discussed with the help of digital support directly during an advice meeting. Thus, existing portfolios can be easily analysed and various variations for reallocations can be simulated and visualised. The investor is always at the centre of the advisory meeting which improves the quality and creates a lasting advice experience.
If you are interested in how a digital advice following the 4-pillar system works, you can experience this in a personal demonstration of the investment advice solution of UnRiskOmega. You can find more about the solution, which is already being used by various financial service providers, here: Solution WEALTH
