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Investment consulting arrangements under scrutiny

Advice groups can expect their investment decision-making processes to be put under the microscope following the royal commission hearings into the sector, says Activus.

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry will be a “watershed” moment for financial advice, said Activus Investment Advisors managing director Robert Talevski.

As a result, adviser’s investment decision-making processes will be placed under “intense scrutiny”, Mr Talevski said.

Investment consultants, who are typically used by advisers to review and select fund managers, are likely to be called upon to play an expanded role, he said.

In the past, advice groups have often opted for a totally outsourced model when it comes to investment consulting, Mr Talevski said.

Under this model, the consultants run the portfolios and strategy; covering asset allocation, manager selection, currency exposure, the investment committee and reporting.

But there is a new ‘hybrid’ model emerging whereby consultants work side-by-side with the advice group’s investment team and provide alternative views, Mr Talevski said.


“The partnership allows advisers and investment committees to back up their decisions with research, analysis and evidence-based decisions that enhance independence,” he said.

Professional indemnity insurers are also keen to see evidence of “sound, well-thought-out investment decision-making” within advice groups, Mr Talevski said.

He pointed to comments by principal of insurance broker MKM Partners, John Kelly, who said insurers look for evidence of a “disciplined, documented investment process”.

“[A significant amount of investment risk] can be mitigated by appointing well-resourced consultants with clear investment guidelines,” Mr Kelly said.

According to Mr Talevski, investment consultants are also moving beyond manager selection recommendation and providing “strategic tailored advice”.

“Finally, there is a growing appreciation among advisers, particularly those looking to build scale by taking on more clients, of the time and cost burden involved in making investment decisions,” Mr Talevski said.

“The less time advisers spend on worrying [about] making or changing investment decisions, the more they can focus on building deeper client relationships, meeting the increased regulatory demands and building scale in their practice.”