About 10 years ago Professional Planner was invited by an asset manager’s business development manager to visit a financial adviser’s office and witness first-hand the “art” of portfolio construction. It was an unforgettable experience.
The tools at the adviser’s disposal were a subscription to The Australian Financial Review, a research service feed (if memory serves, it was from a stockbroker), and the friendly BDM.
The process was to scour the AFR, pick a bunch of stocks, check them off against what the research service had to say about them (if it said anything at all) and then ask the BDM to take this “portfolio” back to base and have the stocks optimally weighted.
To say it undermined confidence in the quality of portfolio construction would be an understatement. Since then, we’ve viewed with varying degrees of scepticism and terror how individual advisers themselves construct portfolios for clients – whether it be direct shares – like our friend above – ETFs, managed funds and other vehicles.
The quality and sophistication of portfolio construction have come a very long way since then, thankfully, and the quality of investment solutions delivered to clients has improved immeasurably. Even so, we still take a keen interest in how advisers do it.
Third-party research commissioned by Vanguard shows that the proportion of financial advisers taking the DIY route to portfolio construction has declined steadily over the past five or six years to the point that now, fewer than half of advisers by number build portfolios entirely by themselves, but these advisers account for almost three times the volume of funds under advice (FUA).
The research shows that about 46 per cent of advisers build portfolios themselves today, down from 55 per cent in 2018. In dollar terms, these advisers today account for about 45 per cent of an estimated $894 billion of FUA in portfolios constructed using all methodologies, or around $402 billion.
This figure is up significantly from the 50 per cent of $547 billion of FUA, or $274 billion, they accounted for in 2018.
The growth in FUA per adviser is also partly driven by a decline in adviser numbers from about 22,900 to about 14,200 over the period.
Taking this into account suggests that the average FUA in portfolios constructed entirely or largely by advisers themselves has exploded, from $274 billion in portfolios constructed by 12,595 advisers, or about $21.8 million per adviser, to $402 billion in portfolios constructed by 6532 advisers, or $61.5 million per adviser.
The research shows there are four routes advisers take to constructing investment portfolios for clients, with each adviser tending to favour one approach over the others. Each approach demands different responsibilities of the parties involved, ranging from almost full adviser responsibility to no adviser responsibility at all (see table).
| Portfolio construction paths | |||||
| Approach | Responsibility | 2024 forecasts | |||
| Asset allocation | Manager selection | Implementation | % advisers (14,200) |
% FUA ($894 billion) | |
| Adviser-built | Adviser/AFSL | Adviser | Adviser | 46 | 45 |
| Model use | AFSL/researcher | AFSL/researcher | Adviser | 17 | 13 |
| Bespoke consultant portfolio | Consultant | Consultant | Consultant | 12 | 15 |
| Off-the-shelf solutions | Manager | Manager | Manager | 25 | 27 |
| Source: Third-party research commissioned by Vanguard Australia | |||||
The research shows that the most significant growth in portfolio construction approaches has been in off-the-shelf solutions, which are now used by 27 per cent of advisers, compared to 18 per cent of advisers in 2018.
The research notes that adviser-built portfolios, where advisers self-select and/or use a researcher model as a guide, have steadily declined in use, but remain highly used in the high-net-worth (HNW) market.
It says off-the shelf solutions, which historically have been multi-asset managed funds used by advisers focused on the mass market, have been reducing but this has been more than offset by growth in the use of off-the-self solutions by advisers focused on affluent clients.
The rapidly changing face of adviser portfolio construction illustrates some of the increasing challenges asset managers face in distributing products via financial advisers.
The more than 6500 advisers doing it themselves is a big group to cover (although it’s half the size it used to be); and if an asset manager’s products aren’t included in model portfolios or in bespoke portfolios constructed by asset consultants, they face another hurdle.
But hopefully the incidence of advisers cobbling together portfolios of stocks or funds or other vehicles and then relying on professional managers to optimise a portfolio for them is very much a thing of the past.
