Boutique advisory firm Knight Financial Advisors was an early adopter of managed discretionary accounts in the mid-2000s, when wrap platforms and managed funds were still in their heyday and few advisers recommended direct portfolios.
Today, financial advisers invest around 27 per cent of client monies in listed investments and their use of managed accounts is at a record high, according to research firm Investment Trends.
This trend has largely been driven by the growth of self-managed super funds (SMSF) which hold around 32 per cent in direct shares, 27 per cent in cash and term deposits, and 15 per cent in unlisted property, according to the Australian Taxation Office.
Unswayed by the masses, forward-thinking Knight Financial Advisors decided early on to specialise in direct equities, leveraging the managed discretionary account structure to run tailored portfolios and deliver strong after-tax returns.
For almost a decade, the firm internally administered MDA portfolios on clunky proprietary technology, however, as the practice grew to look after over 500 clients, the resource intensive process became increasingly inefficient and unwieldy.
Knight Financial Advisors currently employs four advisers with over $350 million in funds under management. It has referral relationships with several centres of influence, including a number of local accounting and legal practices.
Got rid of ‘clunky propriety technology’
Late last year, the group decided it needed a more efficient and scalable solution that could propel it to the next level and drive future growth.
After a six month build, it went live in April. According to Peter Farlie, director of Knight Financial Advisors, managed accounts are the best option for investors who want a dynamically-managed portfolio designed to meet their personal needs and goals.
“Investors and advisers increasingly want the transparency, control, flexibility and high level of customisation that the MDA structure can provide,” he says.
But Farlie believes the majority of advisers who run MDAs are struggling with cumbersome administration and compliance obligations.
He says many don’t realise their investment administration challenges could be resolved by outsourcing administration to an experienced MDA operator, freeing them up to service new and existing clients.
At the same time, investment management can be streamlined by developing a robust investment framework, which may include establishing a formal investment committee or outsourcing investment manager to a professional third party asset consultant, research house or fund manager.
Knight Financial Advisors’ decision to partner with an external MDA operator also led it to refine its investment processes, resulting in the appointment of Melbourne-based independent consultant, Stephen Romic, head of research at DFS Portfolio Solutions, to the group’s investment committee.
With over 25 years’ funds management experience, Romic provides input on portfolio construction, asset allocation, investment selection, risk management, fund manager research and reviews. He plays a major role in the committee’s decision-making.
Improved outcomes within defined parameters
The group runs five core diversified model portfolios and nine core asset class models. Each individual client portfolio is then tailored according to the client’s unique needs, goals, priorities, risk tolerance and tax situation. This can be further refined for any individual security preferences a client may have.
“We’ve achieved clear efficiency gains by implementing a new MDA service,” Farlie said.
“A major benefit is our ability to quickly implement dynamic asset allocation changes and investment ideas, based on market developments and events.”
“As a business we’re focused on continuously growing, [and] lifting our efficiency and productivity, without compromising the high level of service we provide to clients.”
Ultimately, as their name suggests, MDAs give advisers the ability to exercise their discretion and use their professional judgement to drive improved outcomes, within defined parameters.
Fairlie says that’s the kind of experience investors want and are willing to pay for. They’re not looking for a financial product recommendation.