As an actuary working as a financial adviser, I have been interested to see how actuarial techniques are helping the advice process.
The three areas I see as most prominent are risk profiling and optimal asset allocation, stochastic modelling to provide a range of portfolio returns and cashflow modelling with stochastic modelling to provide a range of planning outcomes.
The most common is probably the use of risk profiling and the modelling used which produces the optimised asset allocations.
To me, these are bringing robustness and consistency to the investment process which is essential in providing better consumer outcomes. They are also helping to educate clients when it comes to their risk reward expectations. For instance, the ability to demonstrate to a client the impact on returns of different asset allocations engages them in the process and helps them decide an appropriate investment strategy. I have used the Skandia tool backed by Towers Watson and the Simply Biz tool backed by Distribution Technology.
The use of stochastic modelling to produce a range of potential portfolio returns is another very useful tool. Again much more insightful than the standard projections as this helps manage expectations.
The use of cashflow modelling in financial planning also lends itself to the techniques used by actuaries. The basic modelling is fairly straightforward cash flow analysis but it is possible to overlay stochastic modelling to help understand the potential outcomes. Again, as long as this is presented in a client-friendly way, it is a powerful option to have.
I recently discovered at an FSA RDR-ready workshop that my actuarial qualification is approved by the FSA as meeting the gap-fill requirements. It was only after attending this that I began to try and find other actuaries in a similar position to myself.
I have now agreed with the Faculty and Institute of Actuaries that we will set up a member interest group on the topic of actuaries and advice. The types of areas that this group might cover are:
- Sharing of best practice, issues and opportunities
- Continuing professional development from a regulated advice perspective
- Use of modelling in financial planning (cashflow modelling and stochastic modelling)
- Opportunities to strengthen the advice process, for example, through developing tools to aid retirement income decisions (annuitisation, drawdown, other guarantees)
My feeling now is there is already some pretty useful stuff being done from an actuarial viewpoint which is helping the advice process but there is potential to develop actuarial techniques further.
The complexity of retirement planning is one obvious area. How to bring more robustness to the decisions made regarding annuitisation (conventional or investment-linked) and pension drawdown (including fixed-term annuities and product guarantees) feels like an interesting challenge.
The formation of the group is dependent on getting enough interest, in particular, a good representation from actuaries practising as advisers is essential. As there is no known list of such people, please drop me an email at email@example.com or give me a call on 01347 868196 if you fit the bill and are interested in getting involved.
Will Mowatt is director at Mowatt Financial Planning