Many aspects of financial markets have changed since the global financial crisis. There has also been a significant amount of regulatory change as it relates to the wealth industry.
For many professionals in the industry, a focus on putting the client’s best interests ahead of their own is not a new phenomenon, but one that simply speaks to the basis of having a strong and enduring client relationship.
However, with the associated changes and the fallout from arguably the worst financial crisis in a generation, questions around what should be the role of an adviser then lead to questions about what types of services and supporting infrastructure are required by a professional within their business. And then there’s the issue of how these services can be developed and maintained in such a way that provides the right level of flexibility to meet the changing nature of the business and client relationships, while ensuring that the adviser can remain focused on identifying the key success drivers for business growth.
The ability to not be distracted by other issues, which in some respects may not be core to the fundamental basis on which a business is built, is an important part of having a successful business. When I read any article, or talk with advisers, about what makes a successful wealth business, there are a couple of key themes and words that are used to describe the business. And all of them relate back to the client relationship.
Words such as trust, building relationships, understanding, sincerity, committed, integrity, honesty, and transparency are often used to describe why that wealth business has been successful. I can’t recall an instance where the basis of sustainable client relationships and the success of a firm have been built solely upon investment performance. In fact, quite often the best practitioners understand that, given the cyclical and dynamic nature of investment markets, promoting yourself as a guru is a flawed approach with the high probability of a sub-optimal client outcome.
This in turn has the ability to derail the key elements of what makes an enduring and successful adviser –client relationship. Supported around the investment maze So how can an adviser be supported around the investment maze while at the same time ensuring they provide the right support model and outcomes for their clients? It’s in this context that we have seen the increasing rise of model portfolios as the basis by which advisers can begin – and in many cases end – their investment conversation with clients.
While some in the industry view model portfolios as an exercise around compliance and risk management, I would argue they provide much more to any advice business. I believe that appropriate use of model portfolios is inextricably linked to the long-term success of any wealth business and can actually form a significant part of the governance and advice infrastructure.
We all know model portfolios are not new to the finance industry. Nevertheless, they have evolved over the years as clients have become more deterministic about their requirements. Increased product and strategy sophistication have provided both opportunities and challenges in the way that advisers deliver solutions and the way clients access underlying investment strategies.
For example, 10 years ago, exchange traded funds (ETFs) represented a fraction of the investable universe, with most investors accessing beta exposure via traditional index managed funds.
Today, the growing use of ETFs provides investors with a very different option for accessing “beta”. Investment products have also evolved, with long/short equity strategies, absolute return fixed income and targeted return funds more common today.
Encompassing all of these product changes has been the technological shift, with administration platforms becoming increasingly more sophisticated in the services they can provide (that is, the evolution of the managed account from the simple wrap offering), allowing for greater flexibility and efficiency within a wealth business.
Within all of these changes, model portfolios can play a key role in delivering an appropriate and high-quality investment outcome. One of the main criticisms around model portfolios is that they lack appropriate sophistication and are not “tailored” to the specific circumstances of the client. That is, all clients get the same cookie-cutter outcome. Again I’d argue this is a simplistic approach and one that fails to appreciate the nuances of model portfolios.
Model portfolios do not need to be tied to a static investment or asset allocation approach, but can be adapted to suit a diverse client base, and equally divergent market conditions. When I think about the “role” of a model portfolio, it’s much more than providing a “fixed” solution to a client.
Starting point of an investment conversation
First, a model portfolio can provide an adviser with a starting point for an investment conversation about financial markets and expected investment outcomes and risk parameters. Portfolios can indeed be quite specific in their design – shaped by an underlying asset allocation framework that can also allow for both client and market variance. This framework can form the cornerstone to the conversation about a client’s understanding of what’s possible or practical and how they can achieve their investment outcome. Even clients who want to invest in a single asset class (for example, Australian shares) would, in most cases, have a discussion about which sectors of the market they should consider.
Second, using a model portfolio can highlight how an investment strategy can evolve over time depending on the client’s needs and circumstances. There can be more than just a single model – models (or model building blocks of individual asset classes) can be blended to achieve a more tailored outcome.
Third, model portfolios can provide a “proof statement” to the client about the robustness of the business around investments, as they can highlight tangible outcomes that a client can review.
The track record of a model can help shape the client conversation, while being a valuable education source at the same time. Fourth, models are a great way to engage with clients. The ability to support models with collateral and other material that helps the client understand the processes and investment philosophies involved helps to strengthen trust and provides increased transparency to the investment process. Fifth, implementation and ongoing management can be enhanced via the use of a model portfolio.
This can reduce costs to the client as well as to the business, while allowing the adviser to spend more time with existing clients or in seeking new clients. The ability to “scale” a business without losing any of the personal elements associated with meeting individual client needs is a key benefit associated with using model portfolios. Mitigating against compliance burden
Finally, model portfolios mitigate against the increasing compliance and regulatory burdens facing many participants in the market. The ability to have access to a comprehensive investment solution that can be professionally managed should only add to the overall strength of an investment firm, with no detriment to the adviser – client relationship.
Far from removing accountability, the use of model portfolios can actually provide a more robust and consistent investment approach across a business through the development of appropriate charters and governance forums or investment committees, all of which support the aim of delivering a client-centric outcome.
Indeed, in my view, the best practices are those that can clearly demonstrate their investment framework in such a manner. And within that, model portfolios play a vital role in delivering a high-quality investment outcome to clients.
