Industry, product and technology trends in wealth management are converging with the evolution of advice as a profession to create an environment where players at different points on the wealth management chain can collaborate freely without the perceived downsides of a vertically integrated business model, the Professional Planner Licensee Summit has heard.
BlackRock, AMP and Lonsec have created a partnership to deliver to AMP advisers a sophisticated capability for building and managing separately managed accounts (SMAs) in a compliant and cost-effective way. The three-way tie up initially will involve AMP exclusively, but AMP group executive for advice Matt Lawler said it would eventually be made available widely.
“We will be the first to use it,” Lawler said. “But ultimately it will be available for all platforms to use, and for all licensees to use as well.”
Pre-Hayne royal commission, it would have been more likely that AMP would have sought to also fill the BlackRock and Lonsec roles itself, in a vertically integrated structure, and that one or more of the functions – probably advice – would have been subsidised by one or more of the other functions.
Lawler said that is no longer appropriate, given how the industry has evolved, partly through reforms stemming from the royal commission but also through ongoing steps to professionalise.
“We should recognize that we’ve come a long way,” Lawler said.
“That’s true for organisations like AMP [Advice] because we don’t see ourselves as a product distribution company for AMP anymore, which was the old model; we see ourselves as a professional services provider. Our revenue only comes from advisers.”
Lawler said this perspective changes how AMP thinks about services for advisers and, crucially, how it delivers them.
“We need to build things that service our advisers, help them deliver a great client proposition, do it safely in the regulatory environment, and do it efficiently so they can look after as many clients as they can,” he said.
“That’s our criteria for partnerships. If we can tick all of those, that’s why we make the decision, not because there’s somebody else telling us that we’re vertically integrated, we need to support that. That was the old model. The new model is very much about servicing the adviser.”
The struggle is real
Lonsec managing director Michael Wright said the issues outlined by Lawler from a licensee perspective are real. Wright grappled with the same issues seven years ago as the former general manager of advice for Westpac-owned BT.
“I actually can’t see how you can do it on your own,” Wright said.
“That, to me, was vertical integration and where you could have a franchise, like, let’s use BT for an example, that could work all the way through those levels.
“Well, maybe you could do it on your own. But I think this new environment, this new model, it’s about how do you genuinely help more Australians? And if you’re not partnering up to leverage on the services that maybe aren’t your strength, then to me, I think that’s a real opportunity and a real commercial opportunity, frankly, to leverage.”
Wright said the challenge he faced at BT was finding a solution that could be used by 500 advisers.
“It was before we launched our own suite of separately managed accounts [and] the challenge, we were trying to solve for was of all the thousands of portfolios we have that are run by advisers, what’s in them, what’s the performance, and what’s the risk look like?”
Wright said discussions over the use of BlackRock’s portfolio management software Aladdin stalled seven years ago due to cost, but the technology has been “retailised” to the point it’s viable for licensees and advisers to use.
“At the heart of it, if you really look at what this is doing, it’s democratising advice and access,” Wright said.
“We’re all passionate believers in what manage accounts can bring, particularly if you treat it as a practice management solution as opposed to a product.”
Addressing reasons for non-use
However, around 44 per cent of advisers do not use SMAs at all, Wright said, and those that do use SMAs don’t generally use them for all clients. But there are good reasons for this.
“The biggest reason they often state is they don’t want to crystallise the CGT for the client. Fair enough,” Wright said.
“The second one is around access. Most of them haven’t got $350 million [AUM] to basically switch over, to stand up a product with a platform, to engage an RE [responsible entity], to work with an asset manager. They haven’t got the time or the capacity.
“And thirdly, they haven’t got the capital, which may cost up to $100,000 to actually set up; and the fourth one is I can’t even customise it once I do it, unless I’m running it at a portfolio level.”
Lawler said there also are looming regulatory drivers for why the SMAs offered by advisers need to be structured and resourced appropriately and operated and invested competently.
He referred to ASIC Report 779: ‘Superannuation and choice products: What focus is there on performance?’ which he said showed the regulators are going to take a keen interest wherever the retirement savings of Australians are going to be managed.
“That ideology is hard to argue with,” Lawler said.
Wright said ASIC’s report was focused on three stakeholders: registrable superannuation entities, which would normally be APRA’s job; licensees; and advisers.
“Their commentary was pretty much this: If there’s persistent underperformance within your business as a licensee, you need to understand it; you need to be aware of it; you need to deal with it; you need to make changes; and you need to communicate to clients,” Wright said.
“For you to understand is there is persistent underperformance at a model level, you need to understand what the benchmarks are and what the objectives are – not to the [APRA] performance test [but] to the individual objectives of that investment option.
“For me, there’s a couple things: there’s democratizing access – more advice to more Australians, very honorable and something we all want to do – but also helping licensees deal into some of the regulatory issues moving forward.”
Part of a global trend
BlackRock head of wealth Chantal Giles said the tie-up between AMP, Lonsec and BlackRock is a clear outworking of trends that are reshaping the wealth management industry around the world.
“We’re really seeing an evolution of portfolio over product that has really been driven by in the first instance, regulation to fee-for-service [advice], and the portfolio being a service that everyone can have as tangible,” Giles said.
“We’re really seeing this take off even in markets that haven’t had regulatory change. That’s really driven by the sophistication of the wealth management industry globally, and that’s really appreciating that strategic asset allocations drive returns, and technology and implementation and reduction of friction also have a significant impact on outcomes for clients.”
Giles said organisations across wealth management, “be it financial planners, be it asset managers, be it technology providers, [are] really understanding what their comparative advantage is, honing-in on that, and then outsourcing other areas of their proposition to people that have a skill or comparative advantage”.
Giles said technology is a clear driving force behind significant changes, including digitisation and customisation of services; consumerisation, or easy access to tech-enabled solutions; the ability to address “the full wealth continuum” and have relationships with clients “from their first dollar they invested all the way through to retirement”; productivity gains realised particularly through generative AI; and the rise of the so-called “wealth-tech orchestrator”.
“We’re seeing more and more partnerships in technology, again thinking about the competitive advantage that you have as a tech provider, but how do you bring different other technology partners in to create a smooth bundling experience for advisers across everything that they need in their practice?” Giles said.
Lawler said that once the service is bedded down it will be opened up to other participants.
“We’re doing a lot of the heavy lifting early,” Lawler said.
“We’ll be exclusive for the rest of this year, but I think that’s only fair because we’re through everything we do [and] it takes three times as long because we’re doing it for the first time.”
But the potential of the partnership for AMP and other licensees is clear, Lawler said.
“A lot of our bigger practices have got the benefits out of SMAs,” Lawler said, but a practice really needs $300 million or more invested in SMAs to justify the cost and resources required.
At that level, firms need to have the scale to be able to deal with an asset consultant, tailor the portfolios and have people in the business that can run those portfolios and look after them on an ongoing basis, Lawler said.
“We’ve seen some of our bigger practices have got massive amounts of efficiency,” he said.
“They generally look after an average of more clients, because they can do that. We were looking for an arrangement where we could bring that to smaller practices, to give them the same benefits of that – that efficiency and the same benefits of that client outcome.”
This article was edited on 28 June 2024 to correct the number of ASIC Report 779: Superannuation and choice products: What focus is there on performance?
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