Simply mapping out an investor’s risk profile and applying a traditional portfolio framework once formed the basis of a wealth manager’s task, but the pace of technological change has opened up new ways for advisers to think about how to run their businesses more efficiently.
Indeed, the onslaught of rich, high-quality information, combined with powerful software, is facilitating the shift to more efficient and considerably more transparent wealth management operations.
At the centre of this technological evolution is the rise of model portfolios and powerful investment platforms, which are giving wealth advisers the ability to execute extremely cost-effective, tailored and scalable portfolio solutions.
Model portfolios provide a combination of professionally researched managed investments, which blend various asset classes, investment managers and investment styles to achieve diversification.
In addition to the traditional menu of investment options, the evolution of investment platforms has given advisers access to various model portfolios, allowing them to reduce administration and the compliance burden of managing multiple clients.
“Aside from the unbelievable amount of time these types of models save, they also mean we can offer much more engaging and valuable services,” says Trent Crothers, a financial planner at Quadrant Financial Planning in Victoria. “We can never control the markets, they will do what they will, but we can really control strategy and now clients can see what it is they’re actually holding. It’s changed how we do business and made it much easier to manage more people and their specific needs.”
Goals-based investing focuses on what people hope to achieve with their money; objectives such as retirement security, purchasing a home or covering school or university fees drive investment strategy.
While this is certainly not a new idea, the advent of model portfolios and their corresponding investment platforms allows wealth managers to focus acutely on those goals, rather than become bogged down in administration.
That said, these technological advances haven’t occurred in a vacuum.
A big demographic shift is also pushing the goals-based approach to the fore. Baby Boomers around Australia, and in most developed nations across the world, began to leave the accumulation stage of investing and instead were looking to fund their retirements. Funding a lifestyle became more important than accumulating wealth for the future. As such, wealth advisers began to receive more and more goal-based demands, which coincided with the rise of data collection and assessment.
Rather than view risk as outperforming or underperforming a benchmark, wealth advisers are rapidly adapting their offerings from simple product selection to portfolio construction. And they are using advanced exchange-traded fund model portfolios to do the bulk of the heavy lifting.
Model portfolios are a diversified system of mutual funds or exchange-traded funds that are grouped together to provide an expected return with a corresponding amount of risk.
Rather than individually select shares, or even funds, the wealth adviser will establish a portfolio of ETFs that offer a timely and transparent way for a client to reach their investment goals.
Josh Persky, portfolio strategist, multi-asset strategies group, at BlackRock Investment Management (Australia), points to three main evolutions within the business of wealth management that have facilitated the rise of the ETF model portfolio.
These are: a shifting regulatory environment, low-cost products in response to a low-growth world and a clear and consistent level of transparency.
“Everyone knows the wealth advisory landscape in Australia is changing,” Persky says. “The technological advancement is inevitable and many advisory firms are really changing their focus from product selection to portfolio construction.”
BlackRock has found that ETF model portfolios are the second fastest-growing business within its multi-asset strategy arm, which now manages more than $US200 billion ($269 billion).
“It’s happening very quickly and once advisers do make that shift, they recognise their business performance suddenly picks up and they can become more aligned with their clients’ needs,” Persky says.
Rather than choose one actively managed fund over another, or one stock over another, advisers are finding they need to put together strategies that work towards goal-based outcomes, in response to a technologically savvy client-base.
“Clients are not looking for a product as such, instead they’re looking for something that helps them meet their goals,” Persky says. “And the compelling and engaging solutions? That’s where technology comes in. Digital solutions are nibbling at the edges of traditional wealth advisory businesses.”
FOFA AND FEES
The wide-ranging Future of Financial Advice reforms created a raft of changes to fees within the industry.
Prior to FoFA, product providers often offered commissions to financial advisers, giving them an incentive to recommend particular products to clients. That often meant the adviser was influenced not to recommend the product best suited for a client – not to act in the client’s best interests. FoFA regulations prompted a change to fixed-dollar fees, meaning advisers charge for services offered, rather than a commission.
“We moved to a fixed-dollar fee structure a few years ago,” Crothers says.
Leveraging technology allows financial planners to compete with dramatically lower fee expectations. It took some adjusting, but tools such as BlackRock’s model portfolios and Hub24’s investment platforms have led to wealth advisers reducing their costs significantly.
“The fee pressure has been enormous on wealth advisers,” Persky agrees. “We see it in BlackRock’s business, where we have an S&P 500 product that we charge 4 basis points for.
“Clients put in $10,000 and we charge them $4 a year to manage it.
“If an adviser has 100 clients in a model portfolio and they decide they want to change their exposure to Japanese equities from European equities, we can now do that in 24 hours.”
“If an adviser does that on their own, they have to produce 100 records of advice, 100 phone calls to clients, 100 signatures, 100 inputs into various accounts. It’s an incredible amount of work.”
Taking that one step further, model portfolios give advisers the chance to treat all clients equally.
“You can tick the box of a new investment decision for all of your clients, you don’t have to prioritise one before the other,” Persky explains.
“Not only does that take a lot of risk off your book, but also it creates so many more efficient processes. You can become a more profitable business.”