Advisory firms are facing a conundrum.
In addition to managing ongoing regulatory reform, they need to find ways to build their business and revenue, despite being at or near capacity in terms of client numbers.
To add the capacity to service more people, many practices are making their back office more efficient by adopting technology that automates parts of client acquisition, advice and investment management.
In the US, mutual fund giant Vanguard, which launched its part-human, part-computer hybrid advice solution in 2015, has found the average Vanguard planner could increase its number of clients serviced from 120 to 600 by using technology including intuitive online questionnaires and video chat to determine a client’s goals, objectives and risk tolerance.
A key component of Vanguard’s Personal Adviser Service is a series of implemented model portfolios, made up of Vanguard’s exchange-traded funds (ETFs).
Unlike traditional private wealth management (PWM), in which advisers provide a personal, high-end service and implement customised portfolios, automated advice typically channels clients into pre-prepared portfolios designed for large groups of investors.
The objective is clear: efficient delivery of compliant advice and the accumulation of funds under management.
Compliance is shaping the nature and delivery of advice.
The few institutions still in PWM need to meet stringent local compliance and risk-management obligations, and onerous requirements imposed by their global parent.
To manage the compliance burden, they have created strict risk-management controls. Off-the-shelf model portfolios are part of that, but they cannot provide investors with tailored and agile solutions – which is what the clients want. Advisers are also increasingly frustrated by red tape designed to stop them from exercising their professional judgement and adding value.
Model portfolios are nothing new but the way they are being used is rapidly changing.
Historically, PWM firms and financial planning dealer groups provided their advisers with a series of ‘paper’ portfolios, targeting a specific risk and return objective.
These mass-customised solutions were the starting point for advisers to build a highly customised, individually managed portfolio. However, the industry’s myopic focus on compliance and funds under advice is driving the proliferation of model portfolios implemented under a separately managed account arrangement and administered on a platform.
SMAs are, in effect, transparent managed funds that allow investors to have beneficial ownership of underlying assets. Like in a managed fund, investors and advisers generally have no say over how money is managed.
Portfolios are implemented by an SMA provider, not the client’s trusted adviser. To experienced PWM advisers, that may sound outrageous. They understand that sophisticated investors do not want to be corralled into mass-market solutions.
According to a report by Morgan Stanley titled Managed Accounts: Evolution or revolution?, Australia’s managed account industry is set to grow from about $18 billion in mid-2016 to $60 billion under management by 2020, as dealer groups and licensees morph into product manufacturers and clip the ticket on solutions such as SMAs. An unintended consequence may be that they commoditise their investment management expertise and, by doing so, lose a competitive advantage. With commodities, it ultimately boils down to price and scale, and the mammoth industry funds will be able to offer
strategies and portfolios cheaper than the rest.
The question becomes: Is efficiency a friend or an enemy? It has the potential to be both.
Leading PWM firms know the line. They know the areas that can, and should, automate and those that are fundamental to their value proposition. They know the services that differentiate them, build trust and engagement, and help them deliver improved client outcomes.
They also have purity of purpose. They recognise that they are personal, strategic advisers – not product manufacturers and certainly not product distributors.