15 years of lessons learnt

By Jayson Forrest - Managing Editor  - IMAP Perspectives

John McIlroy (Crystal Wealth Partners), Martin Crabb (Shaw and Partners) and Martin Morris (Praemium) share some lessons learnt from using managed accounts as part of their advice process over the last 15 years.

“We run 13 model portfolios, of which eight are multi-asset class models. And in 2020, we introduced five responsible investing (ESG) model portfolios, which are also multi-asset class, comprising of Australian and international equities,” says John McIlroy - the Executive Director at Crystal Wealth Partners.

“We offer clients a range of options to cater for their different requirements and needs. Currently, 95 per cent of Crystal’s clients are under the MDA structure. We do offer a non-discretionary service but our fees for that service are higher because there is a lot more work involved in running that type of service.”

Crystal Wealth Partners charges its clients a separate administration fee and a separate bundled fee for investment management and advice, which is charged monthly.

According to John, the market volatility from March 2020 onwards due to COVID-19, showcased the advantages of running portfolios under a managed accounts structure, enabling them to respond quickly to market changes.

“Over the numerous years I’ve been involved with advising clients, I haven’t come across many clients who want to make individual investment decisions themselves,” he says. “They find the SOA/ROA process cumbersome. So, when we bring on clients who have come from a non-managed accounts environment, they experience a sense of relief. They want to put their trust in us, as advisers, to make the investment decisions for them that are in their best interest.”

John was speaking at the IMAP Adviser Roadshow 2021, where he was joined with the Chief Investment Officer at Shaw and Partners, Martin Crabb, and Praemium’s Head of Distribution, Martin Morris.

However, the path to managed accounts has been different for Shaw and Partners, with the business having to adapt its offering from one that was primarily transactional-based, as a stockbroking business, to one that was more holistically advice driven. And according to Martin Crabb, managed accounts were a significant part of that evolutionary change.

Nevertheless, he concedes that bringing the business’s advisers - with many having a stockbroking pedigree - on that transitional journey was a challenging undertaking. But the key to ensuring a successful transformation has been “advice flexibility”, by ensuring that the business made its investment platform as flexible as possible for advisers.

 “We have some advisers who use goals-based portfolios, where all the investment decisions are made for them. But we also have other advisers who want to do the asset allocation and securities selection. They see this as a ‘value-add’ for their clients.

 “So, as a business, we needed to build a platform that had enough flexibility to allow advisers to do the asset allocation, if that’s what they wanted to do.”

 While Shaw and Partners still offers goals-based portfolios, which makes up about 20 per cent of its business, Martin says a more modular approach to investing has become increasingly popular with its advisers. “For example, some advisers may just use the global equities sleeve, while others may just opt for hybrids.

 “This meant we needed to build our platform in a way that was flexible, because our advisers weren’t going to be able to easily transition from being stockbrokers to wealth managers in one easy step. This approach means that our advisers can still do equities and IPOs, and the type of stockbroking work they have skills in and find interesting to do, while at the same time, being able to slowly transition their business across to wealth management advice,” says Martin.

According to Praemium’s Martin Morris, one of the most important undertakings for any advice business is to get its investment philosophy right, which then leads to implementing the right technology solution to deliver the right outcome for clients.

It’s a view supported by Martin Crabb. However, he reveals that at Shaw and Partners, there is no formal investment philosophy in place.

“While we always strive to deliver the best outcomes for clients, almost all our clients are domestic investors, who are paying some form of tax, which determines our approach to how we build our portfolios,” Martin says. “We take things like franking credits and hedging Australian inflation into account when building portfolios.

“Therefore, how we go about building portfolios, and how we look at returns, risk and drawdown, means we try to take a very domestic investor focus. And accessing franking credits does make a huge difference to returns. So, when we’re looking at building portfolios from an investment philosophy perspective, it’s about how we complement the investments our clients already have.”

At Crystal Wealth Partners, John believes the key to an effective investment philosophy is having three interrelated components all aligned and working together - the investment philosophy, the management of the business, and the technology - to deliver the right investment outcomes for clients.

“Once the investment committee makes a decision, you need to have the technology in place that can inform you about the possible implications of that decision on the portfolio, like CGT liabilities. There are so many factors that come into play with portfolio management, which means you need instantaneous information to facilitate the implementation of your investment philosophy.”

 The investment committee at Crystal Wealth Partners comprises of internal members, as well as external partners, including equity managers and asset consultants. There are set rules in place about how the committee can operate and how decisions are made. And while there are often robust and opposing views on the committee, John adds that ultimately, “decisions are always made based on the client’s best interest”.

Once the investment committee makes its decisions and the information is shared with advisers, John says it’s important that this information is also distributed to clients. An important part of this process is having Crystal’s advisers, who are not part of the investment committee, sit in on investment committee meetings as observers. He believes this is a good way of ensuring that the information is disseminated to clients.

“The time that we save by using managed accounts means that we can spend more time with clients,” says John. “Generally, we try and see clients 2-3 times a year. And while our business provides ample communication with clients outside of these meetings, most of our communication probably still happens at the client meeting, because that’s where we spend the most time with clients individually.”

 It’s a similar story at Shaw and Partners.

 “As a business, we don’t send information out about portfolio changes or investment decisions directly to clients because all of our clients are serviced through advisers, so we want the advisers to be the point of contact. By using this approach, our clients look upon their adviser as the person who is running the portfolio, and not the portfolio manager,” says Martin.

 While many advisers might find integrating direct securities into a portfolio administratively cumbersome, it’s not something that Crystal Wealth Partners has problems doing. According to John, the business uses both domestic and international direct shares, as well as direct fixed interest, managed funds, ETFs, REITs, and alternatives - for its more sophisticated investors.

 “We don’t find direct equities are particularly difficult to do administratively. Where they are held under custody, then that’s quite straightforward, provided you have the technology to automatically distribute dividends and make portfolio changes,” he says.

 Martin adds that a major trend he is seeing globally is the number of unlisted investments becoming listed. He points to the New York Stock Exchange (NYSE) as an example, where he says there are more ETFs than stocks listed on the NYSE.

 “I think the new listed and unlisted vehicle - which is often referred to as the Magellan structure - makes a lot of sense. You’ve got T+2 settlement, you’ve got live pricing, you’ve got no embedded CGT - it’s a much better solution for clients,” he says.

 Another trend Martin identifies on the horizon is the greater focus businesses will place on ‘value’ in their client service offering.

 “Most people who look at capital markets and where interest rates are now, are seeing single digit returns for high risk assets and almost nothing for low risk assets. So, in a world where we are used to charging separate fees for advice, investment management and platforms, then that’s the client’s return gone,” he says.

“There is a constant struggle to add as much value to the client outcome as possible. As an industry, we can improve client value by using technology, investment structures and improving our knowledge around areas like tax. That’s where managed accounts can play a very important role, by providing clients with an efficient solution in a very cost-effective way.”

John expects ESG and ethical investing will continue to gain momentum with investors. He anticipates that over 50 per cent of Crystal Wealth Partners’ clients will be invested in one of its five ESG portfolios over the next few years.

“Other challenges I see from an advice perspective are the FASEA education standards, value for advice, the challenge of ensuring that clients properly understand what advisers are talking about, and the continued improvement in technology for the sector,” he says.

John McIlroy is Executive Director at Crystal Wealth Partners; Martin Crabb is the Chief Investment Officer at Shaw and Partners; and Martin Morris is Head of Distribution at Praemium.

They spoke in a session on ‘What I learned from 15 years advising through managed accounts’ at the IMAP Adviser Roadshow 2021.