The impact of managed accounts on client returns

Tell us a bit about the analysis that you conducted on portfolio implementation during COVID and what the results were.

So we've always known that having good advice is very important, but being able to implement it efficiently is just as important. So we looked at what the impact of what we would describe as inefficient implementation or delayed implementation advice would look like, and we thought it was a good time period around March/April last year to really road test and see what it meant in reality for the clients in those portfolios.

What we did was, we'd pull it apart and go, "OK, if an adviser had a strategic asset allocation for client and sat on that, what would have happened if they had stuck to that allocation and rebalanced that along the way versus just letting that allocation drift up and down with markets." So really just testing if you can rebalance your portfolio what I would describe as efficiently or regularly, which would be in our view on a daily basis if necessary, versus letting that go, which is trying to simulate a traditional advice process where you've got to have a conversation with a client, document that in an SOA or ROA, get approval, then actually do the trading.

That can take three or four weeks, or even three or four months, depending on the client's circumstances. The scenario we put together was a simple portfolio, just showing the difference that if every time the client bought more than two and a half percent for three or four asset classes - equities, domestic equities, global bonds, domestic bonds - what would have happened if that was balanced on the day they happened, versus just letting that ride and rolling through a process. What it showed was during that March/April period, or if you roll it out for the whole of 2020, a client would have had an 8 per cent return if you'd had regular rebalancing, versus just letting it ride and taking the ups and downs, which would have been a 4 per cent return. So that's a 4 per cent differential, which is meaningful in anyone's language, and to put that into dollars, a $500,000 client portfolio would've grown to $540,000 versus $520,000.

So obviously that makes quite a difference in terms of implementation, particularly in the long term for clients in terms of compounding and things like that, if an adviser is able to implement straight away versus if they're hamstrung by compliance delays in implementing.

Now, there's two scenarios with that - I just walked you through the first one, which is around just sticking to a meeting and having a portfolio being in the shape you want it to, and the impact of not doing that regularly. Another scenario we looked at was in a similar timeframe of, let's say we made the right call in late March to go overweight equities and risk assets versus implementing that on a four-week delay. Again, just simulating that advice process delay, a client's portfolio would have risen to about $540,000 if they made that call versus around $530,000, if they had that delayed implementation, which is again showing that drag. So that's one of the really big takeouts for us as part of this - it's not just having great advice, but how you make it come to life.

A client's portfolio is of paramount importance and it can be really meaningful. The timeframe we've used, this example is heightened and it is favorable so let's acknowledge that, but it's not the only timeframe in the last 20 years that has that kind of result. If we're losing 1 or 2 per cent on a client's portfolio from not having as great implementation as we could, that's a risk that an advice client may not achieve their goals, and it’s a risk we don’t need to have versus other forms of doing it. There's a lot of focus on fees and are we paying too much or too little on fees, but the impact of poor implementation can be actually much bigger than are you paying 10 basis points more or less for one fee.

Obviously the COVID crisis was fairly unique in terms of how quickly it all unravelled for markets. Do you think it's likely that we will see events like that again, in terms of that dramatic volatility, and is it worth advisers preparing their practice for that?

It definitely is worth advisers thinking about that and how they run their business around that, and their clients around that more importantly. So if we roll back to the global financial crisis, from the top to the bottom of the market was about 18 months. It took a long time to unravel in that scenario, and it was about six weeks from when COVID really went worldwide and people start taking notice of it to the bottom of the market in late March. Is that a new norm? Hard to say, but I suspect it is as a whole bunch of systemic structural issues have changed the market. Information is much more immediate - there’s a lot more algorithms in computer driven scenarios and ETFs, so we know that's going to change what happens and people will respond a lot quicker.

Then put that together with clients who have got more information than they did 10 or 20 years ago, so you're trying to deal with clients, portfolios and then at the same time, the phones, so how you do both is another interesting conundrum to work through. Which client do you deal with first? I think it's a good time for advisers to take a pause a and think, "How do I want to run my practice? How do I want to give the best of myself to my clients and give them a cost effective portfolio?”

Do you think that message is resonating with the advisers that you're talking to - has this whole experience given them the catalyst to look at managed accounts if they may have been on the fence about it previously?

It's accelerated the trend that was already there. The practices that had made the jump experienced the benefits of that in the last 12 months or over, to be able turn more to calming their clients and providing stronger advice and actually growing their business. There was opportunity to seek more advice versus the ones who had to do all those things at once, and that's become the catalyst to realise it’s not the right way to run my business.

For some advisers, the idea of handing over complete control of the management of client portfolios makes them a bit nervous. What are the options for advisers who might be interested in the efficiency side of managed accounts, but don't want to take their foot off the pedal completely when it comes to overseeing the client portfolio?

What we've just been talking about is how to run a client's portfolio, I have a structural side of this is my advice process, I don't use a bunch of funds or don't want to get a managed account solution and they'll have different pros and cons to them depending on your client base and needs. Then you start digging into that further, so if I want to get into a managed accounts path, how do I do that? Do I want to keep my hand on the tiller around investments or do I want to outsource that and partner with someone? Both of them are forms of partnership, it's just about the level of interaction you have around that.

One is really just about outsourcing and understanding a partner's investment philosophy and what you're getting and working with them. Another model is what we describe as a tailored portfolio or a partner model, where effectively the practice can define more about what they want in the portfolio. That could be around investment objectives, it could be around certain assets or asset classes, or socially responsible investing parameters. There's many different ways that an adviser can make it their style and their flavour portfolio, about what works for their client base, and that's the important part.

How are some of the high performing practices that you work with using managed accounts in their business at the moment? Because there may still be a perception among some advisers that managed accounts are still this vanilla Australian equity solution that doesn't necessarily fit what their clients want.

As the administration capability in the market around the platforms has really expanded over the last four or five years, you've seen the variety of managed accounts expand and grow in that time period. It’s gone from being a simple vanilla equities portfolio that worked for a small niche group of advisers because it solved one little part of the portfolio, not all of the portfolio, but now you've got a whole range of solutions that are multi-asset whole portfolio solutions. Advisers will use those in different ways, some use them as a hundred percent of the client's assets. Others will use it more as a core-satellite where they throw in 80 per cent of client's assets into this solution that I know will do the core job of the heavy lifting, and I'll add my little flavor to have my stock picks and my bits of value-add.

Other advice groups are big enough to have a range of managed accounts. Then you've got to understand more investment philosophies and more things in the portfolio, but they might have a range of solutions with that provider. So there might be a low cost solution around ETFs for your smaller clients. There might be a solution in the middle ground that has a bit of active management for your mass affluent clients, and then your high net worth clients might have direct equities and more active and alternative managers in there. So it could be three managed accounts for each one of those groups. They're all different ways that an advice practice can work with their platform and their manager to provide those.

How do advice practices go about implementing managed accounts to get the full benefits out of them? Because we see a lot of research around the productivity and efficiency gains that firms might get on average, but it might take some time to fully implement them to the point where they're getting all of those benefits.

Investment Trends has some great research around the efficiency gains for advice practices with managed accounts, which works out to be about 13 hours for an adviser per week. So if you think it through that’s about a 30 to 40 per cent efficiency gain per week, which if you drive that out means every client should be 30 per cent more profitable, or you can use that time to get 30 per cent more clients. So what have I have to do around that? We suggest that there's quite a bit of work, and I think it all starts with thinking about how you want to use the managed account in your advice practices.

It's not like a managed fund where you just sack one manager, put another manager in - it needs to change your whole business model. So thinking about which parts of your value proposition are important to your clients, which parts are you going to do, which parts are you going to partner with someone to do? It needs to be really clear and defined, so you will change your process. Think about how that changes the work inside your practice. What do your advisers do, what do your paraplanners do, what do your office administrators do? All their roles will actively change, and it should change for the better because they should be doing less administration and compliance activity and more value add client work. So remapping all those business processes, remapping your client value proposition, and that should actually lead to change in your client meetings. Most client meetings these days would be, if you're in a traditional advice process, a lot of it's centered around the portfolio because that's where you do a lot of your activity around the portfolio - justification of buys and sells.

In a managed account, you spend most of that time actually talking about the client, their goals, or how are the grandkids doing, where is the next holiday once the borders open up, all the things they're actually more interested in talking about than "Should I be in BHP versus Rio?" 

It does change the whole practice, and the more you think about it from that perspective, rather than just substituting managers, the more benefit you get out of that. So if you don't change what your process is, you’re not going to get that whole 13, 14 hours a week. If you really re-map how you run your business, you’re probably getting more than that because you've embraced it.

We’ve seen managed accounts evolve from this more basic equities portfolio solution to an entire multi-asset offering that advisers can use this great efficiency tool. Looking ahead, what do you think is going to be the next big trend in the managed account space as the market continues to evolve?

This space will continue to be the fastest growing part of the wealth management industry, and for good reason - there's all these benefits we've talked about. As a result of that, people will continue investing in solutions around this space, so administrators will continue to get better administration solutions, the platform will have more features and functionality around tailoring exclusions, inclusions, dealing with CGT or the real nuts and bolts things the platforms should do. 

ESG I think will be a big piece in the future, and there will be more alternatives and being able to put more complex assets to the managed accounts. That's kind of next wave, so how do the partners you work with, the platforms or the managers enable you to have these features, and if your client base has a certain bent, how are we giving you that experience as part of that.