In Defence of Efficiency

By Toby Potter,  Chair - Institute of Managed Account Professionals Ltd

This article was written with the assistance of Simon Carrodus, Partner, The Fold Legal https://www.thefoldlegal.com.au/

Both Best Interest Duties and the obligation to deliver service “Efficiently, Honestly, Fairly” mean a managed account service is a better way for advisers to provide the service that clients are lead to believe they will receive

Vertical integration” in financial services is a pejorative term, implying conflict and a lack of transparency, and recent high-profile examples showcase on this. See AFR Dixon downfall spells ‘danger’ for rival wealth firms (afr.com). Towards the end of the article, which was chiefly about “struck off” wealth advisory firm Dixon Advisory, it appears to haphazardly equate managed accounts with Dixon Advisory’s failed unit trusts.

This displays a lack of understanding of the real benefits for clients delivered by well-designed and executed managed account programs.

As financial advisers move toward true professionalism, they will use technology tools to be able to deliver on the promise of portfolios that align to clients’ specific goals and respond to market moves.

The very first obligation of an AFS licensee is to deliver their services “efficiently, honestly, and fairly” (s912A).

Critics of licensee-based managed accounts apparently skip over the words “efficiently” and “fairly” in that section. The advent of technology in financial advice, as in every other profession, is dramatically improving the range and quality of services and products which advisers are able to deliver.

Some of the benefits of this technology progress are provided for a fee, others not.  

In the above article, Matthew Rowe, then CEO of CountPlus, is quoted as saying that managed accounts are a “grey space”.

Let’s examine the “grey space” for an adviser operating in the old-school way, an initial Statement of Advice and every subsequent recommendation supported by an ROA with implementation through the adviser’s office.  

As a result of inflation and geopolitical factors, we are living through a volatile period in financial markets.

It’s quite possible that the investment team in an advice business will decide to take risk mitigation measures and trim their clients’ exposure to global equities, resulting in a change to all or most portfolios.

"If you’re an old school adviser with say 100 clients, assuming that you weren’t on the long Easter / Anzac break or a school holiday, you’ve got work to do. You must calculate and execute the necessary transactions for each client. This is a time consuming process." says Potter.

But where to start – the most valuable clients? The ones who are most sensitive to risk, the ones closest to needing a rebalance anyway so with the greatest potential for substantial portfolio change? Start with the moaners or with the ones whose children are moaners?

The options go on. And it’s down to each individual adviser to work it out for each client.

If your processes mean you cannot prepare advice for each client in an equally timely way, choosing some clients over others isn’t likely to comply with section 912A, or Standard 2 of the FASEA Code of Ethics:

“You must act with integrity and in the best interests of each of your clients” 

Then there is the challenge of actually implementing the recommendations, assuming that the old-school adviser can generate 100 statements or records of advice in a timely manner. Are the clients away – especially now that international travel is opening up?

A substantial change for a client group like this would take months to implement manually. Not much help as the RBA and Fed hike rates and markets move again.  

So where is the real “grey area” for an adviser charging ongoing service fees for preparation and implementation of advice, when it is in fact virtually impossible for them to implement in a timely manner? Timeliness is at least an implied element of most ongoing advice and service arrangements.

Contrast that with the advice practice whose portfolio management service utilises a managed account structure that delivers timely implementation in accordance with a portfolio mandate with well defined risk parameters and return objectives, and delivered for a transparent fee. A structure where portfolio changes can be executed for every client within a day.

Which fee is more likely to comply with Advice Code of Ethics Standard 7 below, a portfolio management fee or an advice fee for an implied service that can’t be delivered?

“You must satisfy yourself that any fees and charges that the client must pay to you or your principal … in connection with acting for the client are fair and reasonable, and represent value for money for the client”

But the broad issue raised by Matthew Rowe is conflict. “It’s a potential conflict because it can act as an influencing factor over the advice,” Mr Rowe said.”

In practice, unlike the Dixon’s in house product with its outrageous, multilevel fees, managed accounts operated by advice businesses, when they do charge fees, are transparent and generally free of the conflicts found in Dixons.

The law relating to the operation of one type of managed account – Managed Discretionary Accounts – requires the MDA Provider to comply with the following – (apologies for the extended quote)

The licensee must ensure that each MDA contract obliges the licensee to:
(a) perform its obligations under the MDA contract … honestly and with the degree of care and diligence that a reasonable person would exercise if they were in the licensee’s position in providing the MDA service to the client; and

(b) act in the best interests of the client in performing its duties in relation to the MDA services and, if there is a conflict between the interests of the client and its own interests in performing those duties, give priority to the client’s interests; and

(c) not use information that the licensee has through providing the MDA services to gain an improper advantage for itself or any other person or to cause detriment to the client[1]

[1] Corporations Act s 912AEB(2)

If you were an investor, wouldn’t you rather have a relationship with an advice business explicitly required to act in this way rather than an adviser who does not have this obligation?

Wouldn’t you rather have a portfolio managed professionally “with the degree of care and diligence..” rather than by an ex-accountant retrained with a spreadsheet, planning software and a template RoA.

Do you feel an optician is less professional because they also sell frames and lenses to implement their optical prescription?

"Professionalism is not just about qualifications. It’s about the development and implementation of advice, and the ability to bring investment management expertise, tools and technology ever closer to each individual retail client." says Toby Potter.

Toby Potter is Chair of IMAP (the Institute of Managed Account Professionals Ltd) whose roles include representing the Managed Account industry

This article was written with the assistance of Simon Carrodus, Partner, The Fold Legal https://www.thefoldlegal.com.au/