The investment management landscape is evolving quickly. Martin Morris and Matt Heine consider what this means for advisers in five years’ time.
Q: How does your managed account offering and platform structurally perform in a scenario when the market, say, closes the day down 25 per cent, broadly equivalent to the 1987 crash?
Martin Morris: In that type of scenario, you’ll find the managed accounts sector and managed account platforms will come into their own. In that type of environment, you want to be able to react very quickly to the market. You want to be able to reduce the impact of trading, because you want to keep costs to a minimum. That’s because there has already been a very large impact on the portfolio returns, and clients start worrying about price.
In the managed accounts world, portfolios managers have very quick access to information. For example, they can watch what’s happening with our portfolio. They can make changes overnight or on a daily basis, which is rebalanced daily. They can take advantage of the netting within the platform, so they are able to minimise their transaction costs.
And with constant improvements in technology and reporting tools, we will see higher levels of communication, real-time reporting and real-time information exchanged between adviser and client. This will improve the trust between clients, advisers and portfolio managers, who are managing the investments.
In the past, lack of transparency resulted in clients worrying about their portfolios. But if they receive information in a timely and cost efficient manner, then we should be able to roll through these storms, like the 1987 crash, quite seamlessly.
Matt Heine: If we are looking at what managed accounts will be in the future, I have no doubt that in the next couple of years, we will see managed accounts introducing intra-day trading, so you can trade in the morning and in the afternoon.
However, it’s important to remember that the managed accounts market does not just comprise one asset class, like Aussie equities.
For example, our managed account offerings are primarily diversified models. About 60 per cent of our portfolios are actually international funds, domestic funds, alternative assets, fixed interest – all the usual asset classes. People are investing directly into international markets using direct equities. So, you’ve only really got 20-25 per cent exposure using direct Aussie equities.
In the event the market goes into a meltdown situation, it’s going to affect all asset types, not just the managed accounts that are driving them. But at least with managed accounts, managers have the opportunity in the morning to hit the ‘stop’ button and to nett off at the client level, and also to communicate with their clients about what’s going on.
Q: Other than possible market-related issues, what is the biggest risk you see that could impact the growth and success of managed accounts over the next five years?
Martin Morris: I really don’t think there will be much that might impact managed accounts. Remember, a managed account on its own is just an investment solution.
However, technology will continue to be a big trend in managed accounts. Improvements in reporting tools, client communication and efficiency of trading are all transformational for the industry.
The sector is adapting to what the consumer wants, which is greater transparency and more control of their investments. If we keep the consumer at the forefront of what we’re doing, then technology will continue to adapt and change for the better.
Instead, the question should be: What will technology be doing in five years’ time? And have we kept up with the changing dynamic of the consumer?
If the industry fails to keep up with increasing demands by consumers in how they use and interact with technology, then that’s a significant threat to the industry.
Matt Heine: At Netwealth, we have started talking about automated investment services. We’re building technology that supports MDAs, SMAs, IMAs and even bespoke portfolios. This technology will enable users to actively managed client portfolios efficiently, regardless of the legal structure that sits above it.
The lines are certainly blurring between what used to be an IMA and an SMA, because ultimately, the algorithms that sit below it (the model manager portals that allow you to load up and manage portfolios) are all the same. So, this is actually providing a massive opportunity for all businesses, regardless of whether they want to be under an RE structure or an MDA structure.
And, if you look at some of the big trends happening overseas, it’s interesting to see that some of the big wealth managers in the U.S.A. outsource everything.
So, what managed accounts do is allow us to work with skilled investment professionals and consultants to access the best investment intellectual property, and then deliver that to clients. As an industry, the opportunities are enormous.
Martin Morris: Our U.K. counterparts say exactly the same thing. They also outsource. They know where they add value and that’s what they focus on, which enables them to spend more time with the client.
Q: What are some of the other big trends you are seeing overseas that have yet to take off in Australia?
Matt Heine: These trends are all around the client engagement piece. For example, if you look at the U.S.A, managed accounts have been there for many decades. They have primarily been equities based but are starting to evolve. There is also huge growth in the ETF market and you’ve got many robo advice offerings with ETF managed account portfolios.
And because advisers have outsourced all their investment requirements, they’re now able to focus on how they better service their clients. So, they are looking at technology as a good way to engage with their clients outside of the review period, while also adding value through things such as aggregation of banking fees and looking at what wealth they manage and don’t manage, and how they can deliver additional services to their clients.
In the U.S.A, advisers’ time has been freed-up, enabling them to put the client at the centre of what they do.
Martin Morris: Before coming to Australia, I was an adviser in the United Kingdom. And one of the things that surprised me when I arrived in Australia was the complexity of the advice on offer. But the average adviser is not an investment consultant. That’s not what most people go to their adviser for. Instead, average families visit their financial adviser to get holistic and goals-based advice.
So, even back then, the industry trend centred on technology. It was about using technology to get more referrals and to provide an improved service offering to clients.
Indeed, one of the big issues for successful businesses is their ability to get referrals. That’s the major part of growing a business, and that’s what we need to be focused on.
Because our industry is so technical, we tend to get caught up on all the regualtory technicalities, like the SOA. But at the other end of that spectrum, is the consumer, who isn’t as concerned about the SOA or complexities. Instead, they want an experience, and they only refer positive experiences. They don’t refer complexities or technical information.
So, I think that’s where we are seeing a difference in overseas markets. They don’t have some of the regulatory complexities that we have in Australia, which has held this industry back somewhat. We need to bridge that gap.
Matt Heine: If you also look at what drives referrals, it’s when clients receive consistent and reliable experiences. And is there any better, consistent and reliable experience than a managed account? Every client is receiving a similar experience and accessing the same investments, but it’s also an investment structure they can tweak and tailor to their own needs.
Ultimately, clients are receiving a very consistent implementation process, where they are not just getting rebalanced at their review, 12 months after the bigger clients have been rebalanced. I think that’s really important, particularly as we delve down into the findings of the Royal Commission and best interest duties.
Q: How do you see the efficiencies of managed accounts changing over the next five years?
Martin Morris: From a technology perspective, the industry is in a bit of a cultural change. Platforms are a business-to-business solution that were primarily designed to enable a business to become more efficient. When advisers are looking at managed account technology, I think there’s still a hangover from that perception.
Advisers are asking: What’s that going to do for my business and how am I going to use this to make my business more efficient?
But the question should be: Where does the consumer fit into this decision-making process?
If you add value in a service, you should get paid for it. And as an industry, we shouldn’t be embarrassed by that. Where you add value for a client, is where you can charge them for it.
Often in the advice world, advisers don’t charge enough for where they add value, so this is subsidised by the areas where they don’t add value.
I think the Royal Commission’s findings will rationalise areas, such as remuneration and eliminating conflicts of interest from a business. So, the biggest issue for our industry is working out what ‘conflicts’ really means in this type of environment. And that’s one of the biggest headaches for advisers. There’s always conflicts, so the issue here is: How do you manage those conflicts?
Matt Heine: If you go back three or four years ago, Netwealth had a couple of false starts. We set up models with licensee fees that were probably there just to replace rebates that were being lost. Not surprisingly, those managed accounts got very little traction, as advisers saw straight through them, and we wound them up. So now, we’re very conscious of that.
Moving forward, the last four private labels we’ve set up haven’t had fees attached to them. So, advisers just aren’t looking at managed accounts to deliver incredible efficiencies for their back-office, but they are also seeing them as a great cost-effective way to implement portfolios for their clients. I think a big trend for the industry will be where advisers aren’t adding additional fees for their clients.
However, we’re working with a number of firms that have invested in building an investment capability within their business, and therefore, they should be able to get paid for it. I think that as long as the fee is appropriate, and it needs to be under an RE structure, then they will stand up well in the future.
I think the key points for SMAs are: firstly, within an SMA environment, it’s actually Netwealth issuing the product, not the adviser. So, there is no real product conflict there. Secondly, any fee that is associated with that managed model (the SMA) is actually a client-directed advice fee. This means the client has agreed to the fee upfront; they’ve consented; it’s transparent; and they can see it on an ongoing basis. It’s no different to a strategy fee.
In that respect, I think this type of arrangement will be acceptable moving forward. Again, if you’re doing something and you can justify it, then you should get paid for it.
Governance standards are increasing, so as an RE for our SMA, we’ve got a lot of responsibilities. Therefore, any group that is going to act as an investment manager needs to be able to display that they’ve got the required investment capability; that they’ve got the resources to run the models or to choose the investment portfolio.
So, from that perspective, you’re going to see a lot of advisers not being able to pass through these gates.
Instead, from a governance perspective, they’re going to have seek independent investment consultants or somebody who is an expert on asset allocation to sit on their investment committee, to enable them to build out their capabilities that otherwise they don’t have. So, that’s a really interesting trend we’re seeing. And in other cases, they are simply outsourcing everything to consultants, like Evergreen and Lonsec.
In terms of building their own philosophies, they’ve still got input into the design of these portfolios, but they’ve got professionals running it.
Martin Morris: There is a misnomer that all these IFAs are running out and setting up their own models. That’s simply not true. The corporate governance at the likes of Netwealth and Praemium are very strong. They have to go through a steering committee. They have to go through an investment committee. There is a full due diligence process that looks at who is managing the money, what’s the risk framework, what’s the PI, and what’s the corporate governance. It’s about isolating yourself as a model manager and thinking like a fund manager separately to that of being an adviser.
So, if you’re a model manager, you go on a platform, where other people will be investing. As an RE, we have to make sure you have the credibility and experience to manage that money. This process means we knock back more advisers than we take on.
Matt Heine: It’s actually quite a good process to go through. At the end of it, what’s great is you sit down with the client, or the adviser can sit down with their client, and show them the process. If the client is interested, they can show them how they filter stocks out, the various valuation targets and all those sorts of things. So, it actually builds out a really robust philosophy that can be used as a marketing tool.
Q: What are your thoughts on the Royal Commission?
Martin Morris: The Royal Commission is the next extension from FoFA. It’s all about consumer protection and transparency. Unfortunately, what the industry does suffer from at times is apathy. So, some of the things that have come out of the Royal Commission are issues like delayed reviews of client complaints, and people paying fees they shouldn’t have been charged for. So, it can only be good for our industry that there has been a shake-up.
However, most of the industry does do the right thing by its clients. So, in that respect, we shouldn’t be too defensive about the Royal Commission’s findings. Instead, we should be positive and reassure our clients that we’re not that segment of the market with the issues. We’re not the bad apple.
In fact, there is much greater scrutiny in the corporate governance and monitoring of investment portfolios of managed accounts, than compared to an adviser selecting managed funds on a platform every 12 months, following their licensee’s audit of funds.
So, I think it’s this type of efficiency and corporate governance that is creating a better level of protection for consumers. It’s also making us more aware that if we want to be a profession, then we need to be more proactive in doing what’s best for our clients.
Martin Morris is Head of Distribution at Praemium and Matt Heine is Joint Managing Director at Netwealth.