Towards managed account implementation

By Jayson Forrest - Managing Editor  - IMAP Perspectives

Nick Avery and Chris Wrightson explain how their business models provide a very different managed account service for advice practices.

Q: Please describe your business’s involvement in managed accounts?

Nick Avery: FinClear is an ASX market and clearing participant. FinClear provides execution and clearing services for financial planners, wealth managers and stockbrokers.

Most of our clients’ assets that we manage sit on HIN (holder identification numbers) and FinClear has developed a managed accounts solution that is HIN-based, so it differs from the usual solutions that are custodial or sit on the larger platforms. However, a limitation with that solution is we don’t offer managed funds. Instead, we offer pure domestic equity models in our managed accounts solution.

As all assets are held on a HIN platform, it means they are easily transferable. The client has full visibility of the share registry, so they can look at their holdings in real time.

Chris Wrightson: Ironbark Asset Management is an asset manager. We have an institutional and wholesale asset manager business. But we are also a licensed responsible entity (RE) for our funds. We take that RE role to market and assist advice businesses build managed accounts.

Practices come to us wanting to build a managed accounts capability, which we are able to facilitate for AFSL advice businesses. We also have a few equity stakes in large scale advisory groups that are growing by acquisition.

Chris Wrightson: When it comes to managed accounts, practices come to Ironbark for four key reasons: growth, efficiency, risk management and compliance.

Firstly, if advice businesses are growing their client base, it progressively gets harder to provide updated portfolio rebalancing when you’ve got hundreds or thousands of clients using the regulatory approach of an SOA and an ROA.

And that’s where you get to the efficiency aspect. If you already have 500 or 1,000 clients, advice businesses are probably finding it hard to communicate, update and rebalance portfolios in a timely manner.

So, a managed account brings greater risk management into a business. Clients who adopt a managed account portfolio get a rigorous approach to the investment management execution of trades and rebalancing, because it’s automated to some extent. That’s because once the investment committee has made its decisions, the decisions get executed for all clients.

So, you remove some of the risk management around human error and transaction error on a client-by-client basis, thereby aiding compliance.

Nick Avery: Most of the clients who use FinClear’s managed accounts solution are SMSF clients, because we don’t run an RE trustee structure, so we don’t look after the retail super space. Clients are looking for efficiencies, compliance and stock trading.

With our offering, we do everything from start to finish. Our only reliance is with the investment manager that sits off to the side. The investment manager makes the decisions on the investment portfolios. Those portfolio rebalances are then fed through to FinClear, which then executes those trades.

This process removes the time it would take for an adviser to make these changes individually across their client base, which is extremely time-consuming, not to mention having to deal with corporate actions.

Corporate actions can actually stop a financial planning firm in its tracks. That’s because a firm has to assess the corporate action, deal with the research team or outsourced investment committee, and then make a decision based on these actions. And then they have to present an ROA back to clients, collate the feedback from these, and submit those back to registries or trade those positions.

Chris Wrightson: When practices come to Ironbark, they are often in a position where they have run portfolios in a particular way, often using managed funds. Essentially, they have been the portfolio manager for all of their clients. What they are looking to achieve for clients is the ability to manage, update and rebalance those portfolios on an ongoing basis, and in a more efficient way, but at a better level of execution for the client.

For example, if their investment committee was to meet each month and something needed rebalancing or changing at the time, the investment committee is able to execute that change there and then for all the clients. So, there is a real client benefit.

When you go down the managed accounts path, you end up managing money on an almost wholesale basis. So, you’re able to go to fund managers, if that’s your particular business model, and negotiate lower fund management fees on each asset class. By doing so, you are able to dramatically reduce the cost to clients by operating, essentially, as a wholesale distributor for your clients.

Nick Avery: Our value proposition is unique. We charge $0 brokerage on our rebalancing and execution. We’re able to do that because we own the value chain from start to finish. Each time a rebalance happens, it’s all netted out in a single fee structure. So, that delivers an end benefit for the client, which advisers like.

Advisers look for efficiency, which enables them to deliver advice to their clients, rather than having to constantly contact them about portfolio rebalances and investment changes. The client pays the adviser for the advice they are delivering. This allows the adviser to step away from the investment process and do what they are paid for - provide advice.

If more capital raisings come through over the next couple of months, that will only add additional stress to financial planning businesses that aren’t running managed account solutions, and particularly those that are purely doing equity portfolios. They will have to update clients every time a capital raising comes through.    

Chris Wrightson: When advice practices come to Ironbark, they broadly know the benefits of managed accounts but they are mostly unsure of what the process is to implement this service.

The process starts with: where are you now as a business, and what are you trying to achieve?

Through that there are steps around the build and design, including the set-up of a structured investment committee (and the hiring of third-party consultants to sit on that committee). It’s important to remember that if you are going to manage money or be a portfolio manager, you need to have the right people with the relevant experience sitting at the table making the decisions.

And then there’s the regulatory side of managed accounts. If you are building an SMA, it’s actually captured as a Managed Investment Scheme, so it needs to be registered as that with ASIC.

They’re the types of things Ironbark does with a client in relation to building a managed accounts service. We manage the design, build and implementation process for them.

Nick Avery: We have a couple of solutions we offer advice businesses. The most popular solution involves having Lonsec put together an investment management group. So, Lonsec is the investment manager. It builds and constructs portfolios, and it makes the actually portfolio changes.

So, advice businesses come in, put their clients into that managed accounts solution and rely on Lonsec, as the outsourced third-party investment manager, to actually recommend and make changes to portfolios. That then allows advisers to concentrate on other things for their clients, like goals-based advice.

However, we have had a lot of enquiries from advice businesses about managed accounts during this COVID-19 pandemic. So, it’s important to properly sound these businesses out first. Most of the advice businesses that come to FinClear have predominantly held equity positions in client portfolios for many years. They do bespoke changes on individual client portfolios, or they rely on third-parties, like Lonsec or Morningstar, to make portfolio recommendations.

We can package up solutions, either as a totally outsourced solution, or we can work more closely with practices to understand what they are trying to achieve with a managed accounts solution. We can develop something where FinClear sits as the MDA provider or operator, and we make sure the client has the underlying compliance, experience and expertise in the investment management process, and the ability to actually manage portfolios. 

Chris Wrightson: At Ironbark, we look at what’s currently in place. For example, some practices come to us already having hired the likes of Zenith or Lonsec, and therefore, they have third-party expertise on their investment committee.

We look at the make-up of their existing investment committee. If they don’t have an investment committee, we ask them to work with us on who will be providing input into that committee. And if it’s just the practice’s founders or financial advisers, we are very clear that third-party participation around manager selection and asset allocation is required.

In terms of the governance of the investment committee, we come up with a charter for the investment committee, which includes: how it operates, the decision-making process, and what its mandate is. So, it’s a structured approach to what we think is an ‘investment-grade’ investment committee for portfolio management.

Nick Avery: When an investment manager or a financial planning practice comes to FinClear and begins the process to move to a managed accounts service, the investment manager is probably easier to deal with. That’s because there is no conflict, as it’s not the one advising the client. Instead, they are just running the model portfolios.

However, we still run them through a rigorous assessment process that includes a questionnaire and follow up meetings, just to make sure they do have the required skills and expertise to manage portfolios. They need to have had a track-record of managing money and portfolios.

Nick Avery: Remuneration is always an interesting topic and has attracted quite a bit of attention inside FinClear. Given that we are also an ASX market participant, we have to be very careful to remove any conflict that is associated with something that might be considered churning from an adviser.

The adviser can charge the investment management fee but $0 brokerage fee, which then removes that conflict from a transactional perspective. So, if the client does one trade or 20 trades, there is no end benefit to the adviser or advice group.

If the advice practice doesn’t want to do that and they want to charge brokerage, then they are not suited to a managed accounts model. Instead, they will need to adopt the traditional approach, which includes sending out SOAs and ROAs. 

Chris Wrightson: Advice businesses should generate their fees from clients as an advice fee. In the past, managed accounts may have been set up where the advice practice might have generated revenue directly from the managed account.

However, we think if you’re running a managed account, and advising clients and collecting a fee for advice, then collecting a separate fee - whether disclosed or not - from a managed account will become more problematic in the future.

So, if you were setting up a new managed account today, we would advise you not to take revenue from the managed account. By setting up a managed account, you will still achieve significant cost savings for your clients, which you can either pass onto your clients or you can use this as an opportunity to slightly increase your fees.

By doing so, the total cost to the client may still come down but advice fees may slightly go up. We think that’s a more sustainable and transparent model.       

Nick Avery is Head of Equities at FinClear, and Chris Wrightson is Head of Wealth Management at Ironbark.