Strong businesses that will thrive over the next three years will need to get the ‘big’ decision right, and there are no bigger decisions for financial advice practices than asset consulting and platform selection.
These two big decisions often made after a practice has changed its licensee structure or by incumbent businesses looking to improve the client experience and gain business efficiencies.
Conversations relating to asset consulting and platform selection will often entail the following:
- Headline rate cards for platforms and special deals.
- Platform providers or asset consultants pitching SMAs, IMAs or MDAs.
- Larger asset consultants pitching a move from flat fee for research into an SMA with a basis points charge.
- Market talk on deals from new asset consultants and big incumbents.
- A new approach to asset allocation and portfolio management.
This noise can easily create a tendency to cut a deal and move on. A more purpose driven approach is to sit back and make, long-term, fact-based decisions in the following order:
- Vision & Values: What the business is trying to achieve and the personal goals of the Principal/s.
- SWOT (strengths, weaknesses, opportunities and threats).
- The Plan: Consider 4 lenses across the business: financials, operations, client offer and people. Establish what you are trying to fix, accomplish and avoid with each of these lenses.
- Taking Action: After conducting this assessment commit to some key initiatives, including platform and asset consulting items.
- Revisit and refresh the client value proposition and segmentation model and most importantly the offer and pricing model to ideal clients. This is critical to the selection of a platform provider and asset consultant.
After going through this process compile selection criteria for a platform provider and asset consultant, based on the strategic work done above. The criteria should reflect the ideal fit for the client base now, desired client base composition in the future and the overall operating structure and rhythm of the business.
Practices will clearly put the client at the forefront of the decision-making process. If outsourcing adds value for the client in the long run, the decision makes sense and the rest is simply perception. Quality practices deeply understand what their clients’ value the most, and the investment strategy is simply a vehicle to execute the value proposition.
A decision to outsource to a professional asset consultant can feel overwhelming and; therefore, price and short-term performance is typically used as a key differentiator; however, people, philosophy and process are much more important.
Typically, asset consultants shouldn’t make short-term investment decisions unless it’s an explicit strategy. Generally speaking, they invest for the long term (10 years plus) and; therefore, relying on short-term performance and cheaper fees can create misalignment.
It’s wise to conduct a full due diligence process on each asset consultant and choose one that best aligns with client needs and the investment philosophy. Some considerations:
- Is their investment philosophy likely to perform over the long run?
- How do they approach portfolio construction – can they easily justify their decision-making process?
- How does their investment approach fit with the client bases needs and objectives?
- What risk are they taking to achieve the stated level of returns?
- What is the actual cost to client?
- How often are they trading?
- What are the estimated transaction costs?
- Are they taking an additional fee on in-house products?
- Are they taking excessive risk?
- How well are they resourced operationally?
- Do they have documented processes and procedures?
- Are their operations separate from the investment team?
These are just some of the questions that should form part of an extensive due diligence process with a 10-year plus time frame.
After making the asset consulting decision we move onto execution of the client portfolios.
Practices may leave a large dealer group or decide to become their own AFSL and organise a ‘beauty parade’ of platforms to see what’s in the market. The outcome is often overwhelming, and it becomes simpler to assume all platforms do the same thing and focus on price; however, the timeless principle of ‘getting what you pay for’ still applies.
Look at a platform decision as a relationship that might last 10-15 years or longer and consider issues such as:
- Evidence of reinvestment in new technology, well beyond maintenance
- Clients subsidising a larger groups rate card
- Service levels and delivery to standards
- A culture of diligence and risk controls, including the ability to manage a large problem
- The approach to rebalancing portfolios, managing cash, and fractional units
Sometimes an incumbent platform provider will sharpen the rate card to keep the business; however, this could simply “kick the can down the road”. It’s often wise to sit back and assess whether problems will keep occurring due to problems with the underlying technology platform, operations culture and misalignment with your desired client experience. Another great source of insight will come from staff that have “day-to-day” interactions with the platform. They will also appreciate their view carrying some weight.