Empowering investor success

By Jayson Forrest - Managing Editor  - IMAP Perspectives

For advisers to thrive in the delivery of managed account advice, they first need to understand the challenges involved in the advice process. Speaking at the IMAP InvestTech 2021 virtual conference, Rick Di Cristoforo - Director of Research Products AU/NZ at Morningstar - discusses six of these challenges.

Advising clients on managed accounts is increasingly becoming a mainstream offering of many advice businesses. But for practitioners to truly excel in advising clients on this investment structure, there are a range of key issues they first need to deal with, particularly in relation to using technology in the delivery of advice.

Speaking at the InvestTech 2021 virtual conference, Rick Di Cristoforo - Director of Research Products AU/NZ at Morningstar - identified six key advice issues for advisers to consider:

• Research and selection;
• Level of detail;
• Investor preferences;
• Asset allocation variances;
• Fees; and

“These are probably the six key advice issues that advisers need to pay close attention to when advising on managed accounts,” says Rick

According to Rick, this is all about the ability of the adviser to successfully navigate the wide selection of products and services available, when choosing research and products that are most appropriate for their clients. 

“Advice professionals have a considerable selection of products and services available from which to choose. That’s why it’s important for advisers to take their time to research the managed accounts on offer, in order to choose the right one(s) for their clients.”

Rick adds that in order to compare and differentiate the wide range of products and services available in the market, advisers need to carefully conduct their research and due diligence to select and blend products into portfolios.

Advisers are also encouraged to look closely at the headline SMA, as well as the underlying portfolio. Rick believes clients tend to be more comfortable with the headline SMA - in terms of the overall portfolio sleeve. This means the onus is clearly on the adviser to deliver clients both the headline SMA, as well as the underlying portfolio assets.

“However, an issue advisers need to consider when using technology is how to view holdings where there may be a crossover with a client’s ‘unadvised or non managed account holdings’, within the context of the overall portfolio,” Rick says. “They also need to consider how to view the account at a sleeve level (as a default), as well as viewing it at a more detailed level when needed.”

Another issue for advisers to consider is how to think about and analyse investor preferences, given the growing trend by investors to areas like ESG, sustainable and ethical investing. This includes the extent to which investor preferences might deviate from established model portfolios.

“There’s quite a lot for advisers to think about, including ESG, exclusions and large holdings. This requires the adviser to carefully analyse the holdings and execute exceptions or preferences within a client’s overall portfolio when needed,” says Rick.

Once the portfolio is implemented, advisers need to consider how the Strategic Asset Allocation (SAA) plays into a manager who may be operating with a Tactical Asset Allocation (TAA), as can often happen with managed accounts.

The reason, says Rick, is because a manager TAA with market movements over time will progressively move the client away from their advice SAA.

There are situations where managed account providers may charge fees at different levels for different operators. Advisers need to be able to differentiate these fees, including how to manage them on a per platform, per account basis.

Importantly, advisers need to be able to prove that their advice complies with the Best Interests Duty and the FASEA Standards.

In particular, Rick highlights FASEA Standards 5 and 6, which is about understanding the advice provided and the overall outcomes of that advice.

FASEA Standard 5: All advice and financial product recommendations that you give to a client must be in the best interests of the client and appropriate to the client’s individual circumstances. You must be satisfied that the client understands your advice, and the benefits, costs and risks of the financial products that you recommend, and you must have reasonable grounds to be satisfied.

FASEA Standard 6: You must take into account the broad effects arising from the client acting on your advice and actively consider the client’s broader, long-term interests and likely circumstances

According to Rick, by thinking about these six key advice issues and by aligning advice to them, advisers are well positioned to ensure the best interests of their clients in the delivery of managed account advice.

He adds that the way in which Morningstar supports advisers in the delivery of managed account advice from a technology perspective is done in relation to four areas. These are:

• 1. Know your client

For advisers, this means understanding the functionality of technologies available, including:

• CRM and the Fact-Find;
• Client portal:
• Portfolio and insurance data feeds;
• Risk profiling; and
• Behavioural finance.

2. Know your business

This is important for advisers, particularly as more businesses seek to consolidate to become larger corporate entities. This includes:

• Adviser dashboards;
• Business and client reporting;
• Adviser onboarding and oversight; and
• Revenue management.

3. Know your product

This is another important requirement of FASEA. It includes:

• Investment data;
• Product fees and features research;
• Investment research and ratings; and
• Portfolio analysis.

4. Know your obligations

Advisers need to be able to prove and support the advice they are providing. This includes:

• Record-keeping;
• Compliance document generation;
• Advice templates; and
• Compliance dashboards.

“Getting all these pieces right will not only deliver the client’s best interests outcome, but you’ll also be ensuring you comply with the FASEA Standards,” says Rick

.

Rick Di Cristoforo is Director of Research Products AU/NZ at Morningstar. He co-presented a session on ‘Integrating managed accounts into advice software’ at InvestTech 2021.

The session was moderated by Brett Ebedes - a wealth management, financial advice and technology consultant.