Advice practices need to have worthy reasons for moving across to managed account platforms or risk getting it wrong from the start, says Dan Miles, managing director and co-chief investment officer of Innova Asset Management.
Miles, speaking at the Institute of Managed Account Professionals (IMAP) Portfolio Management Conference in Sydney, said advisers should be able to articulate what they’re trying to achieve and how it ties into a better outcome for the client.
“Start with the client first; if you’re doing something that’s advantageous for the client first, it’s pretty hard to stuff it up from there,” Miles explains. “That’s how you write the mandate and the promise to the client upfront, so you can work towards delivering on that.”
He says plenty of advice firms who approach Innova for help running their managed account portfolios have the wrong mindset.
“If they come to us, the first thing we do is ask what they’re trying to achieve and why they’re going down that path,” Miles explains. “We actually use that as part of our due diligence before we decide if we want to work with a practice or not.
“If the starting point is that they want to use managed accounts to increase margin, we say maybe this isn’t someone we want to work with. If it’s a client-centric response, like increasing efficiency or the level of service, then OK, that’s a good start.”
Miles explains the steps to setting up a managed account solution from the asset manager’s perspective.
“The next [questions are], ‘How are we going to execute it, and what platform are we going to choose?” he says. “Platforms offer different services for different client bases, so we sit down and ask what the value mechanism is, because they all have strengths and weaknesses.”
The next move goes to the heart of the advice proposition.
“Third, we sit down and ask what you’re trying to do from an advice perspective and how your advice framework functions,” Miles says.
The final element brings the focus back to the asset manager and how they fit in.
“The very last step in the puzzle is, ‘How do we actually fund those goals through investing?’ ” Miles says.
Double-edged sword
Miles points to speed and ease-of-trades as primary reasons a firm might look to use managed accounts. Advisers who were around for the GFC know how important this can be, he says.
“During the GFC, people knew there was a problem but they would have to contact clients and wait for replies to come back,” he recalls. “You’d go through a client list of 150 and you’d be like, ‘Wow, who do I contact first?’ ”
He makes the point, however, that managed accounts aren’t a panacea, and advice firms need to be aware of the good and the bad. Much of the bad, he warns, has to do with increased transparency for the client.
“Transparency is a dual-edged sword – it’s great, because you get to see what’s in your portfolio, but it’s also awful because you get to see what’s in your portfolio,” Miles says. “So, you get calls from clients asking why this single line item didn’t do well while another one did do well, but the reality of portfolio management is that you don’t want everything in your portfolio to go up at the same time, because if it does, it’s all going to go down at the same time.”
The key to mitigating this, says Tom Bignill, co-founder of platform provider Mason Stevens, is to make sure you communicate effectively with the client.
“One of the things we talk about with advisers – which is critical as you move into managed accounts – is the communication strategy that goes back to the client,” Bignill says. “If you run with managed accounts, it’s absolutely critical that you create a communication strategy, because your clients are now going to have that transparency of all the assets that they own.”
