By Jayson Forrest - Managing Editor - IMAP Perspectives
Jonathan Hoyle AFP® discusses three highly significant developments that have all but made essential the need for discretionary, professional portfolio management.
According to Jim Barksdale, the former CEO of Netscape, there are three rules of business. First, if you see a snake, just kill the snake. Second, don’t play with dead snakes. And third, all opportunities start out looking like snakes
5 years ago, Stanford Brown found a snake in the office. Our advisers were managing around $800 million for our 500 or so clients. The Investment Committee would recommend a change to our client portfolios and it would be rolled out one at a time – client review by client review.
Not all our advisers would agree with this change and hence our clients experienced different returns and heterogenic portfolios, reflective more of the behavioural biases of their adviser than the risk profile of the client.
And the paperwork. Don’t get me started on the paperwork! Yes, we had a snake in the building and it needed to be killed.
We made the decision four years ago to switch our client portfolios to discretionary platform-regulated managed accounts (an SMA rather than an MDA) run by a professional Investment Committee.
In January 2017, the Soteria (formerly named Lunar) Managed Account suite was launched. Three years on and we have the highest Sharpe ratios of all the major benchmark multi-asset class indices. And they are now available to external planning groups.
Subsequent to our move to managed accounts, three highly significant developments have all but made essential the need for discretionary, professional portfolio management.
Every January and July, the media are full of articles quoting median returns for super funds. Financial advice clients have become much more aware of how to benchmark their adviser’s managed portfolio.
A Masters of Financial Planning simply does not equip an adviser to manage a large client portfolio. Only specific investment qualifications, such as the CFA and the CIMA do this, in addition to many years of experience.”
Had legendary economist John Kenneth Galbraith worked in the advice industry, he might have quipped that ‘there are two types of adviser – those who don’t know and those who don’t know they don’t know’.”
Higher costs
The first was the 2018 Royal Commission, chaired by Kenneth Hayne. Many profound changes to the financial advice industry emerged, one of which was the bruising and subsequent emboldenment of the regulator, ASIC.
Its approach to the advice industry ever since is neatly summarised in its own words of ‘why not litigate’.
So, problem number one for the advice industry is higher costs. And no, the consumer isn’t that keen on higher fees to fund this regulatory push
Transparency of returns
The second factor is a growing awareness amongst clients of the returns their super and investment funds should be making. This is largely due to the outstanding and relentless marketing campaign conducted by the Industry Super Funds.
Every January and July, the media are full of articles quoting median returns for super funds. Financial advice clients have become much more aware of how to benchmark their adviser’s managed portfolio.
Bizarrely, there is a school of thought within a large section of the financial advice community that clients don’t much care about portfolio returns. Manage to their objectives, so the theory goes, manage to their goals and don’t worry their pretty little heads about confusing topics, such as portfolio management.
Not only is this quite wrong, but it’s also misleading and deceptive.
We obviously can’t guarantee superior portfolio performance, but we should provide our clients with transparency of returns. It’s surprising that ASIC doesn’t mandate this. To paraphrase Russian revolutionary Leon Trotsky: ‘You may not be interested in benchmarking, but benchmarking is most certainly interested in you.’
FASEA Code of Ethics
And the third and final factor is the new FASEA Code of Ethics. Written and repeated throughout the Code and the Explanatory Notes is that financial advisers should not provide advice if they lack the skills, experience and knowledge to do so. Quite so. But this applies not only to Aged Care and Estate Planning advice, but equally to portfolio management.
A Masters of Financial Planning simply does not equip an adviser to manage a large client portfolio. Only specific investment qualifications, such as the CFA and the CIMA do this, in addition to many years of experience.
On the Soteria Investment Committee sit CFAs, ex RBA staff, economists and rocket scientists (literally, not figuratively). Our clients take great comfort knowing their life savings are in the hands of genuine subject matter experts with proven track records of managing large pools of money.
Had legendary economist John Kenneth Galbraith worked in the advice industry, he might have quipped that ‘there are two types of adviser – those who don’t know and those who don’t know they don’t know’.
Don’t play with dead snakes
The discretionary managed account killed the snake. It has been a resounding success for our company, our advisers and most importantly, for our clients.
It is hard to tear up the core of your business and start again, but as Jim Barksdale remarked, all opportunities start by looking like snakes. The temptation to second-guess our decision was at times overwhelming. But we know not to play with dead snakes.
Somewhere at Stanford Brown there exists a room full of dead snakes. No one ever goes in there.
Jonathan Hoyle AFP® is CEO of Soteria Capital, a provider of multi-asset class portfolios, and the 2018 and 2019 winner of IMAP’s Multi-Asset Class Award.