Australia’s broad investment menu holding back custom model portfolios demand

Speaking to ifa, State Street Investment Management vice president and ETF model portfolio strategist Sinead Schaffer explained that some of the unique qualities of the Australian market encourage advice groups or licensees to use off the shelf models, rather than build models specifically for their firm.

Within Australia, 70 per cent of advisers are using off-the-shelf models for their clients, with roughly 30 per cent going down the custom route. This is opposed to the US, where Schaffer stated there is a “huge amount of growth” coming in that space.

This contrast is largely a result of the differences in the Australian and American markets. With 1,100 investment options and roughly 150 asset managers in Australia, the need for specialised, organisation-wide custom models is not as great.

With the variety on offer, the often labour-intensive and expensive process of creating a custom model is unnecessary, especially when there is a pre-existing, off-the-shelf plan that could suit a client’s needs.

“Our platform technology for managed accounts and model portfolios is actually a little bit further developed and is offering a wider range of choice for advisers – independent or aligned,” Schaffer said.

This is contrasted with the US market, which is dominated by only a few big players, meaning the investment seen in Australia is not as necessary.

Despite this, Schaffer said there are still a range of merits to utilising custom models within the Australian market.

“They [the firm] may have a very specific view around an active manager doing a certain proportion and a passive manager doing another proportion. And then they might have also a certain view around fees and things like that. All of that can be taken into account,” Schaffer said.

“The second side to that is that they’re obviously outsourcing that investment management capability. I think in both instances that they are, and so perhaps by having a custom opportunity, they feel that partnership is potentially deeper as well, because it’s just them and the investment manager doing it. It’s not available to anyone else.”

The sophistication of the technology available for management also opens the door for the growth of custom models within Australia, with Schaffer stating that “some platform and technology providers can actually allow for you to include that asset within your managed account.”

“It allows you not to actually have the sale or even have the tax event occur, and you can then continually manage the client’s money within that managed account context.”