Building a managed accounts program

By Jayson Forrest - Managing Editor  - IMAP Perspectives

Angela Ashton (Evergreen Consultants), Justin McLaughlin (ClearView), Martin Crabb (Shaw and Partners) and Paul Saliba (AMP) discuss the challenges of building managed account programs for larger advice businesses.

The magic figure to operate a profitable and efficient managed accounts program within a large advice business is funds under advice (FUA) of $1 billion and over.

 This was one of the key findings to emerge from a panel discussion about ‘The challenges of building managed account programs for larger advice businesses’ at the 2021 IMAP Portfolio Management conference.

 Asked by panel moderator, Angela Ashton - Director and Co-Founder of Evergreen Consultants - the Chief Investment Officer at ClearView, Justin McLaughlin said FUA depended on the business model and margin, adding “but I think it’s north of $1 billion to run a managed accounts program”,  once technology, research, analysis and team resources were all factored in.

 “There is a lot of external technology that exists within platforms that can enable advice businesses to run a managed accounts program at a relatively low level but you won’t make much money out of doing that,” Justin said. “You need scale to run managed accounts profitably and efficiently.”

 It was a view supported by the Chief Investment Officer at Shaw and Partners, Martin Crabb, who agreed that “$1 billion is the magic number”. “As a business, you could probably be profitable or break even at less than that, but bigger is definitely better.”

The panel tackled the topic of what they thought were the most important considerations in building model portfolios, with the use of ‘building blocks’ being the popular approach.

 With 12 model portfolios, Shaw and Partners uses a ‘building blocks’ approach for its model portfolios. This means instead of providing clients with pre-set portfolios that are either conservative, balanced or growth, the business provides clients with the underlying sleeves that sit beneath the portfolio.

 “Only about 10 per cent of the $1.2 billion in our managed accounts program is in pre-set portfolios,” said Martin. “Advisers are choosing to use managed accounts to complement what they are already doing or to access an asset class that might be difficult to access by themselves, like alternatives and global equities.”

 He adds that the most important consideration in building model portfolios is to take the ‘building blocks’ approach, because it provides advisers with more flexibility in what they do. “However, you must remember that the more model portfolios a business has, the more work is required in rebalancing those portfolios as the market changes.”

 It was a view shared by the Senior Manager Listed Securities and Applied Solutions at AMP, Paul Saliba, who recalled his previous time spent at IOOF, which had 62 different portfolios, providing the business with a constant challenge to manage them all.

 Today, AMP runs 17 model portfolios. Paul revealed that one of the challenges of building managed account portfolios for advice businesses is the differences of opinion around investment philosophy at a practice level. AMP has addressed this by developing risk profile based portfolios for different types of clients, like accumulators and retirees.

“We’ve also build core-satellites for those clients who want a more passive approach to investing. And we’re looking to launch listed solutions,” he added. “So, this approach allows advisers to express their own investment philosophy or dial into the investment philosophy of their client, by selecting a solution that meets the needs of the client that is philosophically consistent with their own views.” 

 ClearView currently has about 24 model portfolios, but it takes a slightly different path with its approach to using ‘building blocks’.

 “At ClearView, we have a suite of index and active models. We have found that advisers tend to blend growth models or balanced models, and sometimes use a core-satellite approach,” Justin said. “So, we have used a different way of putting together our ‘building blocks’.”

 When it comes to portfolio management, Shaw and Partners undertakes a complete process - from Strategic Asset Allocation, through to asset allocation and manager selection via its investment committee. According to Martin, for some asset classes, like small caps, it makes sense for the business to use managers, while for other asset classes, like large cap equities and hybrids, direct securities are the preferred option.

 “Many businesses use asset consultants to determine the manager and asset selection, and revert to an investment team, either internal or external, to do the securities selection. However, as an advice business, I think it’s important to get involved in the overall process as much as you can,” said Martin.

 It’s a similar end-to-end approach at AMP, which includes investment selection, portfolio construction and Strategic Asset Allocation, without undertaking the implementation of trades.

 “We also recently launched ESG portfolios, but outsourced the investment construction of these portfolios. However, we provided the manager with a relatively limited universe of managed investments they could select from and then they blended these funds to the risk profiles we had within AMP,” said Paul.

And what about ClearView?

 Investment liquidity is always an interesting issue in portfolio management. Take ClearView, for example, where Justin said illiquid asset classes in managed accounts are managed quite simply - they avoid illiquid assets.

 “You don’t find too many platforms that give you much in terms of illiquid assets, and illiquid assets in a managed account is even more challenging. That’s because with managed accounts, you are essentially a portfolio manager. So, you don’t want your portfolio rebalancing due to asset allocation changes being dictated by illiquid assets,” Justin said. “Therefore, we generally avoid illiquid assets. They’re not part of our universe.”

 AMP also avoids illiquid assets, using daily liquid managed funds with all of its investments. And when it comes to listed securities, the business focuses on larger cap stocks, side-stepping micro caps.

 “Liquidity tends to be driven by the platform, and a lot of platforms simply don’t enable monthly liquid or less liquid vehicles to be used within managed accounts,” said Paul.

 Asked whether there was any value in getting advisers involved in the process of building and managing model portfolios, the panelists were unanimous in having advisers involved.

 Martin said it was essential to have portfolios stress tested with actual advisers who were dealing with clients at the coalface. However, he conceded that getting feedback from advisers could be challenging when there were large numbers of advisers using the portfolios.

 “The key is to have a formal process of reaching out to advisers asking them about the portfolios. However, obviously you can’t implement everything as a result of the feedback, but adviser feedback is an important part of building and managing portfolios.”

 Martin added that if a business was introducing new asset classes, it was important that it checked first with the advisers in terms of whether they understood the asset class, whether they would use it, and if there would be any benefit in introducing the asset class for the client.

 Paul confirmed that AMP has a working group comprising of adviser representatives from each of its licensees. And while these adviser representatives are not specifically involved with the managed accounts program, they are closely involved with the APLs.

 “If we are adding something onto the APL as part of the portfolio, that then opens up the door to discussion about whether that product is appropriate for the adviser and their clients,” said Paul. “This feedback gives us confidence about whether to proceed or not with the product. So, this enables these adviser representatives to be engaged with the process without being directly involved with the actual managed account itself. 

 Justin also agreed that regular adviser engagement is paramount in the portfolio management process. He said managed accounts are most suitable for those financial advisers who delegate parts of their function, like investment selection, while concentrating on their core strengths, such as advice.

 “Typically, advisers who use managed accounts understand that their fundamental focus is on the expertise they can bring to the financial advice process, and are therefore less concerned about investment management. They are comfortable about outsourcing the investment management to a trusted partner, like a managed accounts provider or fund manager.

 “However, experience shows that the advisers most interested on being on investment committees and consulting groups, are those who are least interested in delegation. They’re the type of advisers who love to do the investing themselves,” Justin said.

 “So, you really need to ask yourself, what am I building this portfolio for? Am I building the portfolio for the advisers who love the investment side of financial planning, which is really a bespoke solution, or am I building the portfolio for a much wider group of advisers who are happy to delegate the investment management process?”

 Defining what success looks like for each of the panelists’ managed account offerings and portfolio models was different. For Paul, it was about the broad adoption of each of the portfolio models, while delivering solutions that aligned with the goals and objectives of clients.

 It was a view supported by Martin: “We’re on a journey trying to provide the best outcome for clients, but we still have a long way to go in terms of tax management, portfolio optimisation at a client level, minimising transaction costs and reducing management fees.

 “The obvious measure of success is the amount of money you raise for the portfolio and the performance that you generate for your clients. However, we need to consider the client outcome. Are we doing the absolute best job for clients in terms of the use of technology, providing the lowest costs, using the best managers, selecting the best securities and so forth. As an industry, we should always be striving for self-improvement.”

 Justin challenged his peers to think about success in another way, with the financial planning industry moving from a world of subsidisation to a world on no subsidisation, resulting in an increased cost of doing business for advisers.

 “So, perhaps one of the additional success factors I’m seeing today is how managed accounts can provide improved business efficiency for advisers. Therefore, in order to add value to a practice and provide good outcomes for clients, we need to change how we are doing things. Managed accounts are a good solution to achieve that,” said Justin.

Angela Ashton is a Director and Co-Founder of Evergreen Consultants; Martin Crabb is Chief Investment Officer at Shaw and Partners; Justin McLaughlin is Chief Investment Officer at Clearview; and Paul Saliba is Senior Manager Listed Securities and Applied Solutions at AMP.