It’s been a month since the Royal Commission handed down its final report and thousands of words have been written on the potential impact of those recommendations on the conduct of advice.

With a clearer view, it’s time to think about the viable business models that might emerge as the dust settles. And - given this is IMAP – how does this affect the use and form of managed accounts?

Firstly, and most importantly, the key influences on successful advice models weren’t the Royal Commission’s recommendations directly. In my view, the key factors that will determine what a successful advice business looks like will be:

• FOFA – old news but really impacting on business design, as payments between participants kicks in; and
• ASIC’s response to the Royal Commission. This is all about how ASIC interprets its mandate to ensure the integrity of advice and good investor outcomes.

What is likely to occur will be the combined impact of the following three factors on the way in which financial advice is delivered to investors.

• Product issuers – from industry funds through to fund managers – will continue to have substantial resources to deploy all the traditional marketing techniques to oversimplify investment decision-making and diminish the role of advice.
• Revenue models will need to be precisely aligned to the clarity of the service offering.
• Flowing from this, vertical integration will continue to be an inescapable part of the advice model, as advice businesses use managed accounts as a key tool for implementing the investment component of their advice.

But like all financial products, creating and managing managed accounts is neither simple nor without cost. Creating managed account programs in a way which both delivers the client outcomes promised and also creates the efficiencies that make advice an effective and scalable business, needs scale and a set of professional skills equivalent to creating managed funds.

What does this mean for the sustainability of advice business models over the medium-term?

At the licensee level, we see three business models that will survive:

1. Smaller, self-licensed practices will base their business model on their personal capacity to engage and service clients. They will partner with managed account providers, and portfolios may reflect the adviser’s philosophy or may be drawn from the menu that the managed account provider offers. The cost to client is likely to be where each element of the service is priced separately.
2. Multi adviser groups, which seek to support advisers who are essentially running individual businesses, will need to offer broad, competitively priced managed account programs as part of a menu of approved options, along with coherent information and client engagement. Portfolio management costs are likely to reflect the scale they can achieve with underlying managers.
3. Large organisations with ‘natural’ client bases will rely primarily on salaried advisers providing advice on in-house products, including managed accounts. While they bring substantial resources to the task, they also have to contend with the diseconomies of scale that are often associated with institutions. However, they will have more pricing flexibility, as more of the service is likely to be created and executed internally.

The challenges each business model faces will reflect the way they need to allocate resources between the tasks of finding and serving clients. And then, to ensure they meet their clients’ expectations, the resources they are able to bring to the task of delivering a managed account service that lives up to the expectations they create.

Toby Potter

Chair