Around 27 per cent of new inflows are now invested in listed equities and property, up from 19 per cent in 2012, according to a new report by Investment Trends. Advisers expect that number will hit 33 per cent by 2017.
While advisers are comfortable using managed funds for exposure to international equities and alternative assets, there’s a growing preference to go direct for domestic equities, fixed interest and property.
This is largely because direct ownership provides greater transparency, tax efficiency and control with the potential for lower fees. Portfolios can be tailored to meet the individual needs and objectives of clients.
But compliance risks remain a “major hurdle” for the sector, according to the 2014 Investment Trends Planner Direct Equities Report, which found that advisers wanted more regular and detailed company research and better support overall in terms of portfolio construction and investment management.
Advisers also indicated an increasing willingness to consider investment structures such as managed accounts to help manage the compliance and administration burden.
Advice checklist
There are a number of factors advice businesses need to consider when preparing to manage client portfolios directly.
Before providing advice on direct investments, advisers should be aware of the additional effort this will require. For example, they need to have the ability and skill to construct portfolios, research and select stocks, and monitor and manage portfolios on an ongoing basis. There’s also trade execution and, if they don’t use a platform, portfolio administration.
Perhaps the most prohibitive hurdle is the need to seek client approval for every proposed change to the client’s portfolio by producing a Record of Advice (ROA). For practices that advise a large number of clients, it can take weeks to gain approval to execute a trade across an entire client base, after which time some clients may have missed out on a valuable and timely investment opportunity. This is often because they were unavailable or time poor and unable to get back to their adviser.
The requirement to produce an ROA for every portfolio change is behind why many advisers adopt a “set and forget” approach to portfolio construction and asset allocation. However, a “set and forget” or “buy and hold” strategy works in a long-term rising bull market but it doesn’t work in all market conditions.
Actively managed
In most instances, clients of advisers expect their portfolio to be actively managed, not just in terms of stock selection but also asset allocation. Yet few advisers have the skill, or systems and processes in place, to provide this type of service.
For advisers who are thinking about providing direct investment advice, or who already use direct investments in client portfolios, a discretionary managed account (MDA) structure can provide a solution to this compliance burden.
Under the MDA structure, advisers can make changes to client portfolios without the need to refer to the client as long as the client portfolio stays compliant with a documented set of rules called an investment program. This provides a scalable way of delivering direct investment advice across a large client base, and it can be achieved without compromising the ability to tailor client portfolios.
Tighter scrutiny
Licensees can obtain MDA operator authorisation under the terms of their AFSL. Those brave enough can implement a “Limited MDA”, essentially an unlicensed MDA offer. However, these structures are earmarked for tighter scrutiny and higher capital requirements in the future.
Another alternative is to use a SMA solution although there’s no guarantee that the SMA provider will appoint your AFSL to manage your clients’ portfolios.
There are also MDA providers in the market who assume all the MDA operator function including any current and future capital requirements while enabling advisers to manage their client portfolios with discretion.
