A good team, a good business

By Jayson Forrest - Managing Editor  - IMAP Perspectives

Transitioning to a managed accounts structure can be challenging for any advice business, particularly for smaller boutique firms. Michael Bova (Family Wealth Advisory) joins Steven Jessop (Lonsec) in explaining some of the key considerations advice practices need to make when transitioning to managed accounts.

Family Wealth Advisory prides itself on providing bespoke strategies to manage, grow and protect the family wealth of its clients. Sitting at the core of this boutique Sydney-based business is a passion for knowledge, which is passed onto clients as financial strategies that allow them to live their best lives possible.

But with this ‘passion for knowledge’ came a gradual realisation that the business wanted to spend more time on strategic client advice, rather than portfolio management. It was a realisation that led its Founder and Managing Director, Michael Bova, to move his business across to a managed accounts structure.

Speaking at the IMAP Adviser Roadshow 2021 on ‘How to transition to a new managed accounts program’, Michael says the move to managed accounts was not without its difficulties and pain points, but it’s a decision he does not regret.

“We spent a lot of time finding the right investment managers and consultants to work with. We were looking to build a Strategic Asset Allocation (SAA) portfolio strategy for the business over the long-term, and we also wanted our investment managers to bring a tactical overlay to our portfolios,” says Michael. “So, I needed managers who could provide in-depth analysis, do all the heavy-lifting with research, and who could also sit on our investment committee.”    

The business eventually settled on Mercer and Brad Matthews - from the investment consulting business, Brad Matthews Investment Strategies - for its investment committee. The reason, says Michael, is both external parties brought a different skillset and considerable expertise to the committee.

“I like the fact that we have two competing consultants with different opinions sitting on our investment committee, rather than having just one,” says Michael.

Michael also sits on the investment committee as the representative of Family Wealth Advisory, where he views his role as safeguarding his clients’ capital. The business has a slightly market-based approach to investing, believing that the market is somewhat efficient. But while his investment managers will work within that mandate, Michael says they will never go 100 per cent active or index.

“So, in my role on the committee, I keep a close eye on that. Obviously, I have my own views of the market, but when it comes to the mechanics of portfolio construction, Mercer and Brad Matthews are the experts, so we defer to them.”

According to Michael, the client portfolios at Family Wealth Advisory tended to be predominantly core with a smaller satellite component. So, the decision to transition clients from where they were to where the business wanted them to be, meant it was much easier for it to organise an external investment team to look at its existing portfolios and then work out how to go about transitioning clients to a managed portfolio.

“That approach meant there wasn’t a mass liquidation of portfolios to move clients from A to B. Instead, it was a nuanced move. And although there was some tax and transitional pain involved, it was manageable,” says Michael. “In fact, I wouldn’t have gone down this path if I didn’t think the end outcome would be better for our clients.”

Although not on the Family Wealth Advisory investment committee, Lonsec also participates on a number of other investment committees. According to Steven Jessop - Head of Licensee and IFA Sales at Lonsec - having worked with boutique investment committees, he agrees with Family Wealth Advisory’s approach to its committee by not stacking it with too many ‘experts’.

“I don’t believe there is value in having too many people, purely for the sake of numbers, on an investment committee,” he says.

Steven believes it’s a common mistake for an advice business to have too many advisers or staff members, who have no real interest in portfolio management or the markets, on its investment committee.

“You need to work out if the firm’s members are there for a knowledge grab or if they are there to add value. Some boutique practices have very competent advisers sitting on these committees, who have been managing money for 25 years. So, you can’t fault what they’ve done and how they have done it,” he says.

“But regardless, I do think it’s imperative that investment committees succinctly communicate information to advisers, because they have to understand what is happening and why, in order to convey that to clients.”

From a client engagement and value proposition perspective, Michael says clients do perceive considerable benefit in having specialist investment experts manage their portfolios. And while some clients are not interested in all the details of portfolio management, they do appreciate that the business is providing them with the best management of their wealth.

“However, there are other clients who are more focused on their money. For these clients, it’s reassuring for them to know that we are working with the world’s largest asset consultant, with a team of over 1,500 researchers doing all the heavy-lifting for us. For these clients, it’s a good value proposition.”

It’s a similar attitude that Steven sees with the clients of Lonsec.

“What really resonates with me is the due diligence process that Family Wealth Advisory undertook in selecting its investment managers, and aligning those managers with the business’s investment philosophy. The benefits of conveying the message to clients about what partners an advice business is working with and why, is absolutely important,” he says

Michael agrees that it was essential for Family Wealth Advisory to properly communicate to clients about the decision to move across to a managed accounts structure and explain the reasoning behind it.

“As a business, the decision we had to make was how to get the best outcome for clients. Once we arrived at that, we were able to build our team and portfolios. And that’s when the communication piece with our clients kicked in,” Michael says.

“Our communication strategy revolved around our messaging of: ‘Here is a better way to run your money. Our investment committee makes a decision and that decision gets implemented straight away.’ It’s a quick and efficient process, allowing us to react to the market in real time. It’s a message that clients clearly liked.”

According to Michael, the COVID-19 pandemic was a great example of the benefits of using a managed accounts structure, as there were times when the business had to move quickly.

“So, the ability for the investment committee to meet and make a decision that was implemented across the portfolio quickly, clearly demonstrated the advantages of using a managed account.”

However, Michael emphasises that no client was forced into the firm’s managed account offering.

“We explained to clients that if our investment committee wanted to make a change to the portfolio that they’re in, then those changes would happen straight away, without waiting for any client authorisation. This enabled us to react to the market when we needed to. However, if clients didn’t like that approach with the management of their portfolio, then we would revert to discussing these changes with them at their next meeting.”

Interestingly, the time it took Family Wealth Advisory to transition its clients across to the managed accounts structure actually began before the business went live with its offering.

Michael explains: “We were starting to get some insights into what the portfolio was eventually going to look like in the managed accounts structure. And so when we were meeting with clients, we were slowly adjusting their portfolios anyway. But when our communications strategy began, everything quickly fell into place.

“We got in front of our clients at the review meeting and explained why we needed to move them to a managed account. The majority of our clients who agreed to move across to the managed accounts structure did so because they knew we were giving them advice that was in their best interests.” 

And the communications piece worked, with Michael confirming that the messaging resonated with the majority of the firm’s clients. Only about 2 per cent of clients didn’t elect to take up the managed accounts structure, either for tax reasons, reluctance to give up control of their portfolio, or wanting to take a ‘wait and see’ approach.

As part of the advice process, Family Wealth Advisory takes its clients’ best interests very seriously. Ultimately, Michael believes his clients are in a better position being in a managed accounts structure for two reasons: the ability to execute trades faster, and the overall improved outcome to clients being in a managed portfolio.

To help advice businesses make the transition to managed accounts, Lonsec has appointed a dedicated manager to assist with the process. This includes helping businesses put together an easily executed plan, assisting clients with analysing their client database, and working out which clients the business will move across to managed accounts and when.

“Other factors a business needs to consider include not incurring capital gains as a result of the transition, and a business also needs to meet the best interests duty, which means it might not be able to move 100 per cent of clients’ money into managed accounts. Instead, it might only be 40, 50 or 60 per cent,” Steven says.

“And that’s where the Lonsec transitions manager can help manage that process, by leveraging our investment team to work out which options you keep as satellites, and then we can put together a plan to exit or reduce those satellites over time when market conditions are right.”

Steven adds that Lonsec also assists its clients with marketing programs, educating the advice team and staff about managed accounts, as well as helping to formulate a client communication strategy.    

“The communication piece is absolutely essential,” says Steven. “Whether it’s the white labelling of education material or a webinar for clients, the managed accounts structure needs to be explained clearly, including why it’s the right option for clients to be in.”

Typically, when an advice business transitions to a managed accounts solution, there are four key stakeholders involved: the business, the advisers, the clients, and the back-office support staff. Michael believes safeguarding the wellbeing of his support staff during the transition was imperative, which ensured a relatively smooth process. But he concedes it still required a lot of hard work by the business, “because every single client required a full SOA”.

“However, looking back at the positives of our transition, it did drive a lot of efficiencies in how we manage and conduct our back-office and our advice processes. But there’s no denying it was a stressful time for our support staff. A lot of additional work came through for them, which did clog up the channels,” he says. 

“And the process itself was quite expensive. For example, if you do 120 plans just to transition to a managed portfolio, it’s not cheap and a lot of work is required.”

But despite the pain points along the way in the transition, the team at Family Wealth Advisory succeeded in doing it. “And the end result has been fantastic for our team,” says Michael. “They actually love where we have got to, even though at times it was painful getting there.

“Transitioning to managed accounts has provided us with greater efficiency in how we manage our clients, which has freed up capacity on the money management side of the business. This has allowed us to run the business more profitably and focus on providing strategic advice, rather than portfolio management, which has been great for our business.”

And while Michael acknowledges there has been some staff turnover as a result of the transition, he says the team he has been left with is “simply sensational”.

“If you’ve got a good team, then business is good. And we’ve got a good team!” 

Michael Bova is the Founder and Managing Director of Family Wealth Advisory; and Steven Jessop is Head of Licensee and IFA Sales at Lonsec.

They spoke in a session on ‘How to transition to a new managed accounts program’ at the IMAP Adviser Roadshow 2021.

The session was moderated by IMAP Chair, Toby Potter.