Should practices build their managed account offerings in-house or use an external provider instead was the question posed to two very different providers at the Professional Planner Researcher Forum this month.
One was Mark Minchin, managing partner of Minchin Moore Private Wealth, an in-house provider of individually managed accounts (IMAs). The other was Brook Sweeney, a senior portfolio manager at Lonsec, an external provider of separately managed accounts (SMAs).
Minchin explained that IMAs are an advice service while SMAs are a product. “They have similarities, but they also have a lot of differences,” Minchin said. “We just see them as mechanisms for implementation.”
He said the benefits to a firm like his of offering in-house managed accounts included efficiency, consistency, compliance and rigorous processes.
“It’s infinitely better than running a practice where you’ve got a bunch of advisers making decisions of their own volition or having idiosyncratic conversations with clients,” Minchin said.
Minchin said the system allowed advisers to focus on what they’re good at, which is talking to clients and coaching them on life strategies rather than staring at screens and wondering whether the share prices of BHP or Rio Tinto would rise faster.
“It just brings it all together and ensures no client gets left behind through a managed account,” Minchin said. “The structure is eminently sensible.”
Minchin said his practice set up a seven-person investment committee long before it started to offer in-house IMAs. This committee met every month and was governed by an investment committee charter and robust investment philosophy.
“We’re a practice of 50 people – six of them are on the investment committee which also has one external independent member,” Minchin said.
The firm has a dedicated chief investment officer and an investment team, which includes broker-dealers and portfolio managers.
“We do our own research and take a lot of time and pride in it,” Minchin said.
“The investment committee has incredibly deep conversations and a very rigorous approach to optimising portfolios. That process garners learning in our practice. That rigour spills over from the investment committee to the rest of the team in a way that I don’t think would be possible if we had a third party doing the job for us.”
Minchin added that because the firm is dominated by advisers, the decision-making process is approached differently.
“Researchers and fundies think about managing money differently,” Minchin said.
“Where the rubber hits the road, we’re dealing with mums and dads and all their behavioural problems, and they’re clunky. The idiosyncratic nature of working with real people is just so different to being behind the curtain trying to build a good model.”
When making decisions, Minchin said the investment committee would be considering whether these determinations could be communicated to clients effectively.
“Sometimes the decision is influenced by questions like is this going to create confusion and is it worth taking that trickier course or should we just go with a simple process that clients can stick with?”
Minchin said doing the work in-house had benefitted his practice. “It’s sort of who we are and I can’t imagine us not doing it today – we just wouldn’t be the same kind of firm,” he said.
“We’ve got to run portfolios that people can live with. You can lead the horse to water, but we have to make it drink and make it drink again and again and again. We’re responsible for the lived life outcomes; not just a model that produces a return.”
However, Minchin said the firm is conscious about where their skills lie and the operating model is about playing to those strengths.
“Like most advisers, we’re asset allocators, we’re not trying to be fund managers,” Minchin said.
“We’re not trying to forecast the future, do tactical asset allocation or pick hedge funds. We keep it pretty simple. But most of the time, being simple creates good outcomes.”
Asked about costs, Minchin noted that having six of the firm’s most senior people on the investment committee chewed up a lot of time and came with a “punchy” hourly rate. “But they all turn up every time because they just love it. It’s a passion. I think overall, it’s well worth the investment for us.”
For his part, Lonsec’s Sweeney believed speed was a factor that could benefit firms providing managed accounts in-house.
“If you are an advice group and you are running your in-house managed accounts, then there are decisions that you can make very quickly,” he said.
“Some groups are better at that than others because it can come at the expense of not having documentation about why you are doing what you’re doing.”
In addition to sitting on investment committees, Sweeney said his firm offered clients Lonsec branded accounts, tailored accounts and white-labelled managed accounts.
“There’s a blurring of the lines in terms of how those are structured, it depends on how much clients want to be involved,” he said.
“From a tailored perspective, they can have as much involvement as they like or it can be white labelling where we’re in total control. On the investment committees, we’re either in total control or we may have one vote so we can be outvoted, or we can be a secondary consultant. We are there to bounce ideas around.”
Lonsec has more than 40 analysts and investment professionals doing day-to-day research, including on alternatives, illiquid and private assets. “There is something different we can to the table,” Sweeney said.
“We are also out there talking to individual companies, company management and fund managers. It’s one thing to hear a presentation given on a webinar. But there’s a very different level of interaction when you talk to a company or fund manager on a one-on-one basis. You often get a very different picture.”