To understand some of the advantages of managed portfolios, it is worth breaking down the advantages across three key groups: clients, advisers and practice staff.
- Wins for the client
For an adviser, any product or service must fulfil one overarching brief – better serving clients’ needs.
Control and transparency
One of the headline advantages of managed portfolios is the potential they offer to build a highly diverse portfolio.
Rather than being limited to traditional listed investments, such as equities, managed portfolios can encompass other listed securities, including hybrids, bonds, exchange traded bonds, units and exchange traded funds, as well as unlisted managed funds.
In specie transfers can typically be made into the managed portfolio, and, subject to the terms on which the managed portfolios are made available, specific stock holdings can be removed or swapped to reflect the preferences, current holdings or ethical considerations of each client.
Without an interposing trust, clients can see exactly which assets comprise the managed portfolio, with complete visibility of underlying investments. This transparency also allows advisers to monitor client portfolios on a daily (rather than monthly or quarterly) basis, which in turn can enhance a deepening of the client/adviser relationship.
Tax efficiency
Australian investors are increasingly becoming aware of the need to measure portfolio success by after-tax returns. Yet, in a traditional managed fund, investments are unitised, hence individuals have no control over the timing of transactions with regards to personal tax planning. Indeed, the fund manager’s decision to sell underlying assets may be driven by the redemption requests of other unitholders, rather than reflecting the market timing benefit that an adviser or their client is seeking to achieve.
Within a managed portfolio, tax benefits that can be associated with dividends and franking credits flow directly to the client (which in turn can offer predictable cash flows to them), something that may not always be the case with a managed fund.
Furthermore, by using the platform technology through which managed portfolios are made available, advisers can time the transacting of specific parcels of securities to optimise tax outcomes for the individual client (with a view to maximising or minimising gains).
- Wins for advisers
Benefits delivered to clients can organically flow through to advisers, not just in terms of an improved service but also through business growth via increased client referrals.
Enhanced efficiency deepens the client relationship
Research by the Association of Financial Advisers¹0 indicates that 82 per cent of adviser clients place greatest importance on their adviser’s ability to build rapport, show their concern for the client and understand the client’s needs.
Strong technical skills, on the other hand, are assumed to be a given, with just 4 per cent of respondents citing this as the ‘most important’ quality of a financial adviser.
How does this relate to managed portfolios?
Improved management of tax outcomes (often a key client objective) allows advisers to demonstrate on a practical level, genuine concern for their clients’ tax positions.
The transparency of managed portfolios allows advisers to keep each client better informed, often with near real-time data. The portfolio manager typically provides regular commentary, firstly on their view of the global outlook, and then, on how they are tailoring the position in the portfolios in response to market developments. This can resonate with clients, who can track what is happening in the world in the news, and then see how their portfolio manager is responding to these events. This can then provide a topic of conversation between clients and their social network, acting as a driver of referrals.
The outsourcing of asset management and portfolio construction also provides efficiencies in the implementation and management of client portfolios. This can result in cost savings to the adviser, which can be passed on to clients.
By integrating managed portfolios as part of a broader proposition, rather than as a standalone managed portfolio offer, advisers can access the services provided by the platform provider – including superannuation and investments, consolidated reporting and tax optimisation.
The use of managed portfolios can be a radical step for advice practices, and it may involve a rethink of an adviser’s value proposition. Ultimately though, it also allows advisers to focus on what they do best – engaging with clients to provide holistic and strategic, tailored advice – the very activity that clients value most. From a business continuity perspective, outsourcing the investment function also eliminates many of the concerns over succession planning.
- Wins for administrative staff
As managed portfolios remove a large part of the burden associated with building and managing a client’s investment portfolio, administrative staff are relieved of a wide array of every-day, high-cost tasks.
As all or part of the investment management is provided by a professional investment manager, administrative operations are significantly streamlined. The process of buying/selling investments in-house can be virtually eliminated, offering considerable administrative time savings.
The result is that administrative staff can be freed up to focus on higher value activities. Indeed, a practice may find it needs fewer administrative personnel because of the efficiencies available through managed portfolios, or they can be better utilised supporting client management and strategic advice functions.
Footnotes
- CoreData Managed Portfolios White Paper, 2015.
- Schroders Adviser Survey Q4, 2016
- CoreData Research Adviser Fees and Business Models, 2015
- CoreData Research Adviser Fees and Business Models, 2015
- Schroders Adviser Survey Q4, 2016
- Natixis Portfolio Clarity U.S. Trends Report, Q3, 2016
- Natixis Portfolio Clarity U.S. Trends Report, Q3, 2016
- Natixis Portfolio Clarity U.S. Trends Report Q3, 2016
- www.imap.asn.au/latest-news/636-imap-fum-census-release-june-2017
- The Trusted Adviser - Honouring the client at every turn, AFA White Paper, May 2013 https://3-afa.cdn.aspedia.net/sites/default/files/uploadedcontent/field_f_content_file/afa_-_the_trusted_adviser_white_paper_lr.pdf