Investment tools that were once the domain of institutional fund managers are now readily available to financial planners, giving them the opportunity to be more involved in the investment process. Tim Bradbury explains.
One of the recent (and common) themes in the investment marketplace revolves around the perceived uncertainty of market directions – globally and locally. Will equities continue to be strong? What will be the outcome of turning off the QE2 tap? Is upwards the only direction for sovereign bonds? To name but a few.
In essence, there is a recurring warning about the need to maintain a watchful eye on client portfolios. Investments need to be managed closely as markets may trade in a range, or even sideways, for prolonged periods of time.
This nervousness could be due to sustained fallout from the global financial crisis, but we are seeing the re-appearance of the phrase “dynamic asset allocation” (“DAA”) – that is, the ability to make short-term portfolio tilts to either enhance returns or reduce the risk of identifiable trends.
But let’s face it, volatility has existed in investment markets since the tulip boom/bust and before.
A new paradigm?
So if we accept that DAA is becoming more important for advisers to enable clients to reach their financial and lifestyle goals, this then leads to the question: “Who is best placed or able to manage this process for clients?”
Clearly there are professional asset managers who can offer this service (no recommendations made here, so do your homework!) and of course the fees are high – 1 per cent annual management fee, plus performance fees. But we are also seeing financial advisers moving into this space for their clients – and generally with an independent advice model.
Importantly, they are not selecting stocks and bonds in local and global markets, so they don’t require huge teams of analysts like the big end of town. They are using institutional-like tools and institutional-like methods. That is, they are making asset allocation decisions; and increasingly their tools of choice are exchange-traded funds (ETFs).
With the advent of new platform and administration technology, this can be done cost-effectively and either customised for individual client portfolio needs, or applied scalably across several model portfolios.
This delivers two important facets to an advice practice:
• a key point of differentiation and value-add to clients; and
• an economic opportunity for the adviser to justify (and earn) more of the margin that traditionally went elsewhere.
They retain the interaction with the client and can have a unique conversation at each review time.
In practice
We know the role of the adviser is clearly more than just the investment component – and that there are many different points of view relating to the best ways to manage a client’s investments. This article is not here to pursue any particular case.
We do, however, make the point that what’s changed in the past 10 years is that tools are now readily available to advisers, enabling them to own more of the investment role. The blending of investments can be a lengthy discussion but without doubt, what was once the domain of institutions is now readily available.
Portfolio decisions can all be made much more quickly, simply and cost-effectively with exchange-traded funds (ETFs).
Advisers often echo the value proposition that they are paid by clients for strategy – that is their real value-add and enables them to demonstrate value and charge accordingly. This is often linked to estate planning or self-managed super fund strategies. However, if this theme is applied also to investing, then exchange-traded funds match their business profile and methodology.
Advisers have traditionally built portfolios around a blend of active managers for a range of reasons, including business proposition, choice and decision to outsource the investment decisions.
Active management, like financial advice, involves an exchange of advice for a fee, the benefits of which are only known in the future. Most other purchases in life are more immediate in the receipt of the goods or services purchased.
Financial advisers still delegate the management of a large portion of their clients’ money to active managers and in doing so expect active managers to do just that – manage actively. Clients delegate their wealth decisions, largely upon direction from their financial adviser, and expect both the adviser and the active managers to do just that – manage actively.
So if this is being done effectively, what is one of the most important considerations? The right tools to implement the changing ideas. Enter the ETF as a solution for changing times.
The early movers and why
The early adopters of ETFs both in Australia and overseas have been independent financial advisers. This group, as we know, have a different value proposition from that of aligned bank and insurance advisers, but also a different business motivation. If they are able to make more of the portfolio decisions for their clients, this translates directly into them earning more of the total cost of advice, which sounds only logical.
