Getting financial product design right is not easy and has not always been done well by institutions, Peter Labrie, head of Colonial First State’s investment, managed accounts and product strategy, has told an audience of researchers.
“We haven’t always [got it right], I think, and as the industry continues to evolve we’ll get better,” Labrie admitted recently during a panel discussion at Professional Planner’s Researcher Forum in Sydney.
In his talk, Labrie lifted the bonnet on the process the institution uses to design and create new funds for the adviser market.
Sulieman Ravell, a director at Nevill Ward Advice and also on the panel, stressed that while “you couldn’t get it right all the time”, it should be remembered that from a client’s perspective “we are all accountable”.
“There are implications to the end user,” Ravell said. “I wouldn’t be surprised if people started pointing the finger back up the chain.”
He highlighted that advisers, funds researchers and the product issuers themselves all needed to take responsibility to ensure financial products are properly understood and that they performed the way they’re supposed to.
CFS’s Labrie described the process of product design as “a customer-centric design principle”.
It all starts with demand
The first consideration of product design from the institution’s perspective was desirability, Labrie noted.
“Is it [aiming to] fill a need in the market that currently doesn’t exist?” Labrie asked, before offering the example of a managed volatility offer that provides “equity-like returns but lower risk as people reach retirement.”
The second consideration, Labrie said, was feasibility, which centred around the product manufacturers’ ability to offer and administer the product.
“For example, if you’re looking at providing an ETF, you need to have specialist skills such as market-making and those sorts of things which you may not have at the moment,” he said. “How is this product likely to be rated? If you don’t get the necessary traction in the research space, you’re not going to get any flows.”
Despite the fact most new offerings coming to market are in listed products, Labrie highlighted the majority of inflows still end up in traditional managed funds structures.
The third consideration for product manufacturers is viability, or the economics of the offer. Here, a series of questions need to be asked, Labrie said.
“What are the cost involved in taking it to market, and what are the risks involved? What’s the ultimate price going to look like, and is that going to be competitive in the marketplace?
“And you also have to look at whether it’s consistent with the way that you’re positioning your business values and the direction of the business,” Labrie continued. “If you’re signing up to things like principles of responsible investing, then there’s no point launching a seven deadly sins fund, for example.”
Getting it right is not easy, Labrie admits. Like most providers, he says, CFS doesn’t get it right every time.
Bronwen Moncrieff, general manager and head of research at Zenith Partners, defended the role of ratings agencies in product awareness.
“We put our name on the report and we’re responsible for that,” Moncrieff said. “And in terms of ongoing monitoring, we sit down monthly and quarterly.”
Ravell brought up two examples of collapsed funds – Astarra and Basis Capital, both highly rated funds in their day which subsequently collapsed – to illustrate where a lack of diligence from researchers, advisers and ratings agencies could lead.
