The decade-long evolution of investment advice

Over the past 10 years the investment systems and processes underlying services delivered by financial advisers to clients have changed and improved significantly. 

Advisers have benefited from huge leaps in technology and an ever-widening field of investment options to choose from, and whether the changes would have happened anyway or were accelerated by regulatory change is largely beside the point: they’ve changed, and generally for the better. 

Invest Blue partner and Victoria regional head of advice Duncan Murray says 10 years ago investment solutions were “pretty basic”. 

“You either had your high-net-worth type clientele, who were maybe running direct equity portfolios and things; or you had your multi-manager investment option, all-in-one thing, and the investment return pops out the end,” Murray says. 

“We’ve pretty heavily moved away from that for most clients. I wouldn’t say all, but certainly, an old school, multi-manager [solution] would certainly not be in vogue, that’s for sure.” 

But Murray says that while the solutions have evolved, what hasn’t changed at all is what clients want and need from their advice relationship. 

“People are looking for a trusted partner,” he says. “They’re looking for someone to build a relationship, who they can put, effectively, their everything, financially, in stewardship of. 

“But the development of some of these kinds of new technologies and new solutions, particularly in the context of APLs [approved product lists] opening up and that alignment between an advice practice and their licensee opening up, has really allowed for both the development, and the wholesale adoption of, some of these newer investment solutions.” 

One of the defining characteristics of the newer solutions has been “a move to greater transparency”, Murray says. 

“That’s probably a massive driver throughout – let’s call it – the last decade,” he says. 

“You’re starting with clients and investments that really are probably pretty black-box, clients aren’t really sure what’s in there, sometimes advisers aren’t 100 per cent sure what’s in there, and everyone’s in this post-conflicted remuneration environment, where everyone’s looking for openness, they’re looking for transparency, all of that side of things.” 

Smoke and mirrors 

Integro Private Wealth managing partner Justin Gilmour says financial advisers have long been well-regarded for the strategic advice they provide, and the relationships they have with clients, but a decade ago there wasn’t the quality and robustness of an investment offering to back that up. 

“I always thought the investment offering was substandard, it wasn’t done properly, there was a lot of smoke and mirrors,” Gilmour says. 

“We wanted to industrialise the process, but we also wanted to move into the high-net-worth space. We knew that we just couldn’t do that with that old multi-manager, broking model. 

“Clients expected more, and it wasn’t [just] reviewing clients when they came in for their strategic reviews, they wanted that ongoing. To be regarded as a true wealth manager we needed to up our investment process and our offering, which is the reason we went out to that SMA-type [separately managed account] structure.” 

Gilmour says the changes at Integro were driven by business and client needs, and not necessarily by regulation, although “I definitely see why, for some, it would have been spurred by that”. 

“If you didn’t have the scale and the processes and system to be able to deliver a proactive sort of service for your clients, then…regulation pretty much closed a lot of those one-man-bands, where they had to stop operating and then actually start building a process to comply with current legislation,” he says. 

In a sense, what Murray and Gilmour describe is a migration of institutional investment processes and systems into the adviser space, and the effective industrialisation of investment processes. It is partly a result of the changes advisers themselves required to generate business efficiencies; and it’s been partly driven by regulatory change, particularly the Future of Financial Advice reforms and the removal of conflicted remuneration.  

Investment consulting firm InvestSense celebrated its tenth anniversary recently and its development over the decade parallels how the industry has evolved and how adviser needs have changed over the period. 

Benefits of institutional funds management 

InvestSense director Jonathan Ramsay says that when the firm was founded its focus was mainly on constructing model portfolios, but the backgrounds of the firm’s founders meant they wanted to apply some of the same principles – and offer advisers the benefits of – institutional funds management. 

“The thing that we had a very clear conception about, and it was the reason why we left van Eyk [Research] and started InvestSense, was we’d all come from a sort of institutional funds management background,” Ramsay says. 

“We’d ended up in retail consulting, where it was all model portfolios, and we felt good about the fact that it was closer to the end client. But we had mixed feelings about the fact that we just did this stuff and it went out into the ether, and you didn’t really know where, and it was all quite messy, really.” 

Ramsay says he and fellow InvestSense founders Jonathan Tolub and Fil Andronaco understood and “we were very enthusiastic” about the applications of SMAs for advisers, dating back to their time at van Eyk. 

“It was, we can do all the stuff that we do in retail, but we can manage it like it was an industry fund or a multi-asset fund,” he says. 

“Unfortunately, that was about five years too early. There was this ‘build-it-and-they- will-come’ mentality: we knew it was the right mouse trap and we’ve always had conviction about that.” 

Ramsay says the effects of both the Future of Financial Advice changes to commissions on investment and superannuation investments and the Haye royal commission combined to turn a headwind into a tailwind. 

“Basically, clients weren’t incentivised to do the thing that we were offering, really, and that was the headwind,” he says. 

“All of a sudden it turned into a tailwind, and then the client piece sort of came on board and we started to be able to adapt to what clients actually needed, rather than just having this technical view of a thing that we thought was the right mouse trap.” 

The bottom line for clients 

InvestSense head of distribution Paul Carrington says the benefits for both advisers and clients of more sophisticated and robust investment solutions are reflected in statistics from Australian Financial Complaints Authority. 

“[There are] only two areas in the investment and advice complaints area that have actually had a reduction in the last five years, and it was around service quality, and it was all also around the reduction in the amount of claims around failure to follow up or implement,” Carrington says. 

He says this suggests that advisers are spending more time “on clients, servicing clients and having better conversations about their future needs, rather than just on the investment piece”, and the efficiency benefits of managed accounts mean there are fewer issues with advisers making errors during implementation of investment decisions, or failing to implement investment decisions at all. 

Murray says a clear benefit of the evolution is greater consistency and higher quality in the solutions provided by advisers. 

“I certainly can say that we’ve got a better system, a system that provides more certainty, because it’s more consistent,” he says. 

“You can’t have 100 different clients with 100 different results on the back of just the things were implemented at different times. 

“Certainly, risk for clients is reduced drastically, particularly in large practices. You can’t have, you know, tens of advisers running around doing their own portfolios, and let’s see which one does the best. You want a consistent approach that’s measured, that you can defend, that you can talk to a client about and say, ‘Here’s the reason we made that decision, rightly or wrongly’.” 

Gilmour says freeing up advisers’ time means greater scope to guide clients towards making better decisions. 

“And that’s on a couple of fronts,” he says. 

“We do extensive financial modelling for clients, so it’s not uncommon for clients come and see you through the year with an investment opportunity or a strategy or something that we vet. But clients are now inundated with product, and they’re not coming through BDMs direct to advisers, it’s going direct to clients.” 

Ramsay says the adviser’s role becomes crucial as part of the “unbroken chain of understanding”.  

“At the end of the day, the client is better informed,” he says. “You’ve got more transparency and it’s a system that just kind of works.” 

Gilmour says the value advisers clearly add today, probably more so than a decade ago, is “helping clients avoid making poor decisions as well as making good ones”. He says that clients also have a better understanding of what is happening, and why. 

“Our clients are a lot more engaged now,” he says. 

“They’re making better decisions, because we’re modelling scenarios through time, not just at review time, but whenever they’re going to make any sort of investment decision – whether they’re going to give money to kids, or whether they’re going to buy houses for kids, or whatever they’re going to do. 

“We’re modelling those outcomes so they’re making better decisions, which invariably means we get a better overall investment outcome, because we’re not tired of pretending or trying to do that. We’ve left that to the experts.”