Speaking at the IMAP Investment Management Conference in Sydney, Piers Bolger and Martin Crabb talked with Damian Cilmi of Praemium about the importance of getting the foundations right when building an investment program internally within an advisory business.

Damian Cilmi: Why did you decide to build an investment program internally within your advisory business?

Piers Bolger: We clearly saw a number of benefits of developing our own internal capability, particularly around the execution model and how it sat within the advice process. 

When we started Viridian Advisory, we thought about what out business could look like over the next three, five and 10 years. This included how we wanted to position our investment offering within the business and engage our clients around that as a value proposition. 

For Viridian, the managed account solution was where we wanted to go, as it allowed us to tailor investment solutions for client portfolios. It was the right model for us. 

Martin Crabb: At Shaw and Partners, we already had a securities research team in-house, so it was a logical extension to develop a managed account solution. We already had the capability to provide advice, so developing a managed account solution was just a natural evolution of what we were doing.

Damian Cilmi: In terms of resourcing, what did you need to invest in to implement an internal investment program within your business?

Piers Bolger: There were three elements. The first element was choosing the right technology that allowed us to implement research into the portfolio structure. Technology is not cheap, so this is one of the biggest challenges for businesses wanting to get into managed accounts. 

The second element was to ensure that the investment business within Viridian clearly sat apart from the advisory side of the business. This is an additional cost to the business. So, if you want an institutional grade offering within your business, you need to invest in it.

The third element was deciding what we wanted to do internally versus outsourcing, by looking externally for assistance or input into the business. So, it’s important to clearly identify your internal investment philosophy and capabilities, and where this is lacking. Where you don’t have the necessary skills or expertise within the business, you need to look externally for these.

It’s also important how businesses set themselves up from the beginning. If you do this right from the get-go, you’re not chasing your tail. It enables you to develop a much stronger offering and value proposition for clients.

Martin Crabb: We already had a strong equities capability. We had a good hybrid strategy and some good equity strategies for both large and small caps. However, global equities was the missing piece for us. 

So, we started out with an ETF-based global equity portfolio using a tactical asset allocation company model, but it wasn’t up-to-scratch and not institutional grade. We were crying out for a really good global manager. Fortunately, we were able to find one in AllianceBernstein. We currently use the AllianceBernstein Concentrated Global Growth strategy.

As an advisory business, if you don’t have the internal capabilities, don’t try to do it inadequately yourself. Spend the money and get a partner with the required capabilities to help you.

Damian Cilmi: How did you go about putting your investment program together?

Martin Crabb: It’s a work in progress. We decided to go down the path of building an advice framework around the managed account program. At its core, Shaw and Partners is a stockbroking business, so our advisers aren’t used to doing things like goals-based advice or objectives-based advice. 

So, we needed to develop a framework that allowed us to deliver a managed account program and an advice solution at the same time? That included looking at the fact-finds we were doing, the risk profiling we were doing, and then the asset allocation that would sit behind that. We also needed to have the flexibility within our managed account program to dial up and down our asset allocation.

The managed account structure needs to be flexible and cheap enough to transact on. You need to have the right structure, the right advice framework and the right execution capability out the back-end.    

We are cognisant that we need to do a lot more work with our advisers. Goals-based advice is not straightforward. 

Damian Cilmi: How do you manage the challenge of ensuring advisers are on-board with your managed account program?

Martin Crabb: When it comes to adviser types, you’ve got the early adopters, the true believers and everything in between. So, we’re less focused on whether all our advisers are embracing managed accounts because we offer a range of services to clients. When it comes to products and services, we just want to ensure we provide the best in-class that we can for each individual client across the range of advisory services we offer.

Piers Bolger: As a business, what we don’t want to have is a very long tail. So, we have to be able to demonstrate value and the adviser then needs to demonstrate that value back to their clients. 

One of the big challenges we’ve had over the last few years has been having advisers saying to their clients that their value proposition was investment management. However, that changes with managed accounts. So, they have to adjust their discussions with clients around a new value proposition. 

This is always an interesting discussion to have with clients,  when the investment management is now being outsourced to another part of the business. 

But as a business, you need to be firm. You can’t let things just meander along. You have to be absolutely clear about what the business stands for and where it’s heading.  

Martin Crabb: Often you see the most financially successful advisers – those who earn the most and manage the most assets – don’t typically get involved with investment management or securities selection. They outsource all that. Instead, what they are good at is finding clients, looking after people and developing trust with their clients. So, they don’t try to be all things to all people. 

Successful advisers realise that it’s all about the client experience and the client relationship. They understand that they can outsource all the investment management and securities selection to enable them to focus on what’s really important for the business. 

Piers Bolger: Importantly, the way we are thinking about our engagement model revolves around how the platforms are evolving. One of the challenges that we’ve seen is that platforms have a lot of functionality but no two platforms actually behave in a similar manner. We’re currently on two platforms, soon to be three. 

Platforms need to evolve and catch up to the managed account world. This is something we’re mindful of when providing solutions to clients, because we need an administration vehicle that can properly execute those solutions. Without having an administration vehicle to do that efficiently, makes it very challenging to deliver the types of investment solutions we want to deliver. 

Damian Cilmi: One of the benefits of running a LICENSEE-based investment management program is the proximity it allows you to the end-client. What are some of the learnings as a result of this proximity?

Martin Crabb: The key challenge for us is having a story for every single holding within a portfolio. There has to be a reason for having these holdings, to explain the reasons why. And if there are changes to a portfolio, you need to communicate those changes back to clients and explain the reason for the changes. Effective client communication with managed accounts is massive.

Piers Bolger: Building client trust in the management of their wealth is essential, as is working with the adviser to help them manage that client relationship. It’s part of what you should be focusing on within your business. You need to be able to deliver that and ensure you have the resources to be able to provide that one-on-one relationship between adviser and client.

Damian Cilmi: Are you seeing an increase in interest by your clients in Environmental, social and governance (eSG) investing?

Martin Crabb: I really haven’t seen any increase in the level of interest in ESG. If you go to any institution presentation, ESG is a major focus. But at a retail level, while people talk about ESG, I haven’t had anybody come forward and request an ESG version of what we’re doing or request that a holding, like Woolworths, which is one of the biggest purveyors of gambling and tobacco, be removed from a portfolio. 

I’ve heard that Millennials are big on ESG, but they aren’t the typical generation of clients advisers are currently dealing with. But this may change as Millennials begin seeking advice in the years ahead.

Piers Bolger: When it comes to investing, we tend to look at ESG more around the edges, rather than taking a blanket view towards ESG within a managed account portfolio. Somebody’s view on ESG can be very different from another person’s view. So, we much prefer to take a tailored approach to ESG when that’s required.

Damian Cilmi: Are managed accounts a suitable solution for all your clients?

Martin Crabb: We don’t product flog managed accounts. We put our services in front of our clients and our advisers will help their clients choose the best mix of investment options and solutions that are in their best interests.

Managed accounts are constantly evolving. I can see a future where we take individual tax parcels into account when we look to do a transaction. And if you look at using alternatives with liquidity issues, fractional ownership, derivatives, swaps and all these sorts of things, they are currently part the institutional world. However, with technology and scale, a lot of these things can be brought to the retail market.    

From a business viewpoint, it would be great if all our clients were in managed accounts from a compliance perspective, because you know exactly what is going on, but managed accounts are not necessarily for everyone.

Piers Bolger: Managed accounts are not without their challenges, and clearly, they are not appropriate for every type of client. But, if a managed account fits in with a client’s objectives and needs, and is appropriate for them, then we will recommend this solution for them.

Damian Cilmi: As a business, does it help you to have both single asset class models and multi-asset class models?

Martin Crabb: We have five times as much money in single strategy SMAs. Most people are using the SMA like a stock or a fund, like the hybrid SMA or the Aussie Large Cap Growth SMA. I think that expands your reach. And advisers are using it in different ways. For example, advisers might take on more of the asset allocation decision and leave the securities selection to the investment committee. 

Damian Cilmi: As Chief Investment Officers, how are you accountable for your decisions?

Martin Crabb: It’s all about transparency in our decision-making. Anyone who has managed money will know that you are measured hourly, daily, weekly and monthly on your performance. It’s a numbers game, so it’s relatively easy to see if you are or aren’t doing your job as an investment manager. 

We also have 27 different managers that we are also using for securities. For example, in our balanced portfolio we have 150 securities. 

There has to be several levels of accountability. The investment committee selects the managers in our program. But ultimately, as CIO, I take responsibility for the investment outcomes and if they’re not good, I’ll be asked to leave.

Piers Bolger: There are very clear lines of separation between the investment committee and the wider business. In the context of our offering at Viridian, we benchmark against what our peers are doing in the marketplace. We also need to clearly translate the rationale as to why our solution is working and why it’s still viable for the business. 

So, it’s very important that the investment committee is run at an appropriate level from a governance viewpoint. That enables you to more easily identify what you are doing that’s right or wrong, and adjust accordingly. 

You also need to be able to clearly articulate your decisions back into the business and importantly, that means the business needs to understand the rationale behind your decisions and the position you are taking. 

But no matter how good a manager is, there is always going to be cyclical movements in the market. So, as CIO, it’s about managing this by having the right structures in place. But ultimately, a CIO is accountable by the performance that he or she delivers.

Piers Bolger is the Chief Investment Officer at Viridian Advisory, and Martin Crabb is the Chief Investment Officer at Shaw and Partners.