There will be fewer boutique research firms and independent consultants offering services to advice practices on asset allocation and investment implementation decisions in coming years despite the continuing expected growth of managed discretionary accounts, a senior consultant at JANA predicts.
There are some 30 boutique investment consulting firms along with dozens more ‘one man band’ consultancies that make up investment committees and are responsible for the formulation and implementation of those practices’ investment decisions, Professional Planner estimates, based on its annual Researcher Forum event.
It’s among this group of smaller consulting firms where some will “fall by the wayside” as competition in the area heats up and as the balance sheets of these firms are tested, Michael Karagianis (pictured), JANA’s retail partnerships senior consultant, says.
“The growth of the managed account space has been significant but perhaps might not have met the expectations of some,” Karagianis, who is leading JANA’s push to grow its retail client base among advice practices, says.
“You have to be very patient. I think if [you’re an asset consultant and] you have a business model based on getting $1 billion in the door in the first year or two, I think you are going to struggle,” he adds.
Currently JANA is the investment model manager and appointed asset consultant for Melbourne based Strategic Wealth as well as the sub-adviser for a second advice practice and is close to announcing a new consulting relationship with a third practice, Karagianis says.
JANA doesn’t currently offer its own product on platforms and approved product lists such as the braded separately managed accounts (SMAs) some other consulting and research firms do, “although we’re not saying it’s something we will never do,” Karagianis notes. The business uses the same inputs for its retail clients that it provides to institutional clients relating to asset allocation, manager selection, investment models in addition to reporting and access to manager rebates, Karagianis explains.
JANA is the institutional asset consulting business that was majority owned by National Australia Bank before a management buyout in 2017. NAB Asset Management remains JANA’s largest client but it also has long standing relationships with the likes of REST, Industry Super and Hostplus. The former NAB-owned business is among a number of institutional asset consultants that have descended on the retail advice market in recent years. Frontier Advisers along with Mercer are among the other consultants traditionally focused on advising superannuation funds that have been quietly growing their influence with advice practices.
“It’s more fragmented now [the advice industry] so you’ve got advisers that are less constrained by centralised research process and I think a lot more discretion so they can appoint consultants that match their approach or philosophy,” Karagianis describes, outlining the rational the increased interest in retail advice by the more institutionally-focused asset consultants.
“Increasing compliance, good governance requirements, it all begs for good practitioners to come into this area. And you have seen a flood of them,” he says.
Stage is set
While Karagianis is predicting a shakeout of independent researchers and boutique consulting firms in coming years, the stage is set for more money to flow into managed discretionary account and SMA structures following recent market activity, reckons Toby Potter, who operates Philo Capital as well as industry association Institute of Managed Account Professionals.
“One of the key benefits amidst the recent market volatility has been the capacity for advisers to execute not only transactions relatively quickly but in a nuanced way including progressively increasing cash holdings or asset class doing it in a stepped fashion,” Potter says.
“Those who operate a managed account are finding they are able to execute advice recommendations in a way that’s not possible in a more traditional investment approach.”
IMAP’s industry research suggests approximately $80 billion of client funds are invested via a managed accounts or SMA structure. Inflows into managed accounts have been growing at around 20 per cent per annum in recent years, according to IMAP numbers.
The managed accounts industry has been plagued in the past by questionable management of conflicts of interest; ASIC said recently it planned to put on hold the work it has been doing in this area prioritise its resources in light of the COVID-19 crisis.
Even if the segment does continue to grow, fund flows into managed accounts doesn’t happen quickly, Karagianis notes.
“It takes a while [for funds to flow into managed accounts] and it should take a while because getting an adviser to shift clients into a managed accounts structure on day one isn’t necessarily in the client’s best interest, it’s something advisers have to look at it carefully over a period of time,” he says.
It’s this more gradual adoption of these structures that will lead to fewer independent and boutique consulting firms lasting, Karagianis reckons.
“We are more patient, we are not here to win in the first year or two,” he says.