An MDA journey: Lessons learnt along the way

By Jayson Forrest - Managing Editor  - IMAP Perspectives

Staring out with MDAs in 1997, Findex has become one of Australia’s largest providers of MDA model portfolios. Speaking at the IMAP Adviser Roadshow 2021, Kieran Canavan shares some of the insights and lessons learnt from running MDAs over the last 24 years.

With over $17 billion in funds under advice, of which $9.5 billion sits in MDAs, today, Findex is one of Australia’s largest providers of Managed Discretionary Account (MDA) model portfolios. But that wasn’t always the case for this financial advisory and accounting business.

“Coming out of the GFC, the problem we faced was how to grow our business in a very dynamic market,” says Kieran Canavan - the Chief Investment Officer at Findex. “There were systemic issues with investment markets and institutions, technology was starting to change, and clients’ were becoming more discerning and less trusting.

“Looking at this rapidly changing landscape, we were trying to figure out how to become ‘match fit’, so we could respond quickly and make the most of a changing environment.”

Kieran concedes the business knew it had to do things differently, which meant building Findex’s future on two key pillars: the client value proposition and the employee value proposition.

“These two pillars are inextricably linked, and are a business’s most important assets,” he says. “If a business can focus on these two fundamental areas, you will have processes and a business that will deliver you long-term sustainable growth.”

Speaking at the IMAP Adviser Roadshow 2021 on ‘Why larger advice practices prefer MDA programs’, Kieran says that by focusing on its client and employee value proposition, Findex identified that ‘scaleability’, ‘efficiency’, ‘investment outperformance’ and ‘compliance’ were the drivers to delivering the long-term sustainable growth the business was looking for.

Kieran explains: “Scaleability is the key to growth. Whether you’re a financial adviser, an IFA practice or a dealer group, you need to be able to grow. Without growth, you won’t be able to invest in your business.

“We also looked at ‘efficiency’ through three sub-parts. Firstly, how do we become efficient when bringing on a client and providing them with new advice? Secondly, as the circumstances of clients or markets change, how do we amend that advice efficiently? And thirdly, how do we implement that efficiently from an investment perspective?,” says Kieren. “The key was to link those three parts together, which we were able to do through our client engagement.”

‘Investment outperformance’ was another key area of Findex’s value proposition. Findex has a mandate to manage clients’ money on a medium to long-term basis, so it was acutely aware that if it regularly underperformed with its clients’ money, not only would the business struggle to retain its clients, it wouldn’t attract any new clients.

“So, you need your investment performance to be consistent and strong,” he says. “In fact, many of our new clients have come to us because of issues with their previous adviser’s investment performance or investment implementation.”

According to Kieran, in order to consistently deliver investment outperformance, the business needed a professional investment team and institutional-grade investment implementation. “The combination of these two points will allow you to get the right sort of investment performance,” he says.

‘Compliance’ is the fourth key area that Kieran identifies as been crucial for delivering long-term sustainable business growth. “Make compliance your friend and look at it as a differentiator for your business. Use compliance to provide your clients with a better experience, while also making it better for your team.”

By putting these four key elements together, the business discovered that the MDA structure ticked all four boxes in its drive to deliver long-term sustainable growth for the business.

When Findex eventually adopted the MDA structure in 1997, it needed to closely engage with both advisers and clients. Kieran concedes it was a significant change in the business’s relationship with clients, with clients having to give Findex the discretion to make investment changes. But it was a change the business believed was in their best interests.

But why go with the MDA structure? “Customisation,” says Kieran. “Unlike the managed account structure, MDAs provided us with the ability to customise the MDA, like changing the asset allocation or holdings when required.”

He also adds that the compliance frameworks for MDAs is very strong, which provided clients with further reassurance.

“As the MDA provider, we have to be audited on our processes and asset values, and the client receives the audit report. Clients felt more comfortable knowing that our MDA structure was being audited by Deloittes,” he says. 

Findex views MDAs as a differentiator for the business and a definite value add for clients.

“We look at value as being part financial, part emotional and part risk management. And that’s powerful because it helps you set the tone of how you engage with your clients. It positions advice as being more than simply investment returns, and sets the stage for managing client expectations around the advisers’ ongoing role,” says Kieran.

At the core of Findex’s value proposition are three elements: financial advisers; the products team; and governance.

1. Financial advisers

Financial advises are responsible for the client relationship, including understanding the client’s needs and objectives, and linking the client’s goals to the right strategic advice and portfolio.

2. Products team

The products team comprises of two parts: the professional investments team and the investment implementation team. Both teams work closely together.

“The investment team builds the models, and Findex uses external partners to help build these portfolios. The investment team spends time with the implementation team to determine how to implement the assets. That’s because when you make good investment decisions, it’s critical that you implement them quickly and efficiently.”

3. Governance

When it comes to providing MDAs, governance is critical. Findex ensures diversity in its governance structures, including having independent members sitting on the investment committee who have the power to veto any decision if it’s not in the client’s best interests.

The business has also appointed an independent client advocate, who is not a client of Findex and is therefore, free of any conflicts with the business. The client advocate engages with clients, enabling the advocate to hold the Findex Board and committees accountable for their actions, while ensuring that the views of clients are taken into account with Findex’s decision-making process.  

“When everything is fine, governance is not an issue. However, when things go wrong, that’s where governance does become an issue,” Kieran says. “So, you cannot underestimate the importance of setting up good governance frameworks.”

Having grown its MDAs to over $9 billion in FUA in just under 25 years, Findex is a good example of a business seeing value in the MDA structure and building it as a core part of its service offering.

So, what has been some of the key observations the business has learnt over the years? Kieran points to three: pricing, scale and partners.

He explains: “MDAs have allowed us to change our pricing, with the uplift in fees being 20-25 per cent. The selection of the MDA structure and appropriate platforms, has allowed margin expansion and cost control.

“Your pricing strategy is very important, especially with MDAs, which means your clients have got to understand all your pricing. One of the things we did early on with our value proposition was splitting out the client fee into two components: the advice fee and the portfolio construction/ management fee.

“That enabled us to better articulate the value from the investment side and the value from the strategic advice side. Clients could then easily see the value in what we were providing them with, which is incredibly important in your value proposition.”

Kieran also reiterates that scale is very important for a business. However, with about 140 advisers servicing over 12,000 clients, what has been critical for Findex in attaining this scale has been gauging the views of its clients about the overall size of the business. He believes this is an important consideration, because a business creating scale shouldn’t drive clients to feel that they have just become a number. “Otherwise, clients will leave and obtain their advice elsewhere.”

And finally, Kieran says businesses offering MDA solutions should seek specialist compliance and outsourced providers to help protect the business from making mistakes.

“We found bringing in external partners has really helped us to get our compliance framework right. By doing so, we have been able to concentrate on working more closely with our staff and clients, knowing that we had compliance professionals working with us to ensure we wouldn’t be making mistakes.”

Kieran Canavan is the Chief Investment Officer at Findex.

He spoke in a session on ‘Why larger advice practices prefer MDA programs’ at the IMAP Adviser Roadshow 2021.

The session was moderated by IMAP Chair, Toby Potter.