When it comes to rolling out a managed accounts offering, Phil Smith CFP® wishes he had done it years ago. Jayson Forrest talks to him about the challenges involved.
Cutcher & Neale isn’t your typical advisory practice. For one thing, it has a close affiliation with the NSW Australian Medical Association (AMA) as its ‘Preferred Accounting Partner’. It’s a mutually beneficial referral partnership, which sees many high-net-worth clients turn to the expertise of this accounting and financial services firm.
“Our client base is typically high-net-worth, sophisticated professionals,” says Phil Smith CFP® – a partner at Cutcher & Neale. “We have a lot of SMSF clients and a lot of investment portfolios in company and trust names.”
However, Phil says the business – based in Newcastle and Sydney – is a little different in the sense that all its investment portfolios are a direct asset model, rather than a managed fund model.
“We’ve been doing direct assets from virtually day one, which is about 23 years ago. Our Aussie and international equities portfolios include ASX, NASDAQ, NYSE, STOXX and FTSE-listed companies. And with our property exposures, we’ve actually invested in the building of a Kmart at Port Macquarie, and we’re also currently doing the same with a Bunnings in Brisbane. So, you can see, it’s a direct asset model we’re using.”
Established in 1953, Cutcher & Neale has an industry pedigree spanning well over 60 years. But the firm’s investment services division, which Phil is responsible for, is somewhat younger, having formed in 1994.
Interestingly, although the firm prides itself on delivering a wide range of services – such as forensic accounting, superannuation, financial planning, risk insurance, investing, auditing and software services – in something that is somewhat counter-intuitive, Cutcher & Neale is only a recent adopter of managed accounts. It’s a surprising fact, given the firm’s approach to direct investing.
It’s a truth not lost on Phil.
“I realised some time ago we couldn’t keep operating on the IMA-type structure of SOAs and ROAs. I did look at the managed account environment about five years ago, but the technology at that time wasn’t really there for what we wanted to do.”
Back then, Phil was specifically looking for a provider that had an international equities currency capability. It was a crucial criteria for Phil.
“So, until providers got up to speed with that capability, we really couldn’t go down the managed account route.”
Fast forward five years, and with more providers offering the type of international currency capability Phil was looking for, Cutcher & Neale was finally able to roll out a managed accounts solution for its clients this year.
However, Phil concedes that choosing the right provider for the business was difficult and required a great deal of due diligence.
“In selecting a provider, there were a couple of things that were important for us. Firstly, the importance of being able to transact internationally, and secondly, being able to store the cash in the currency of the offshore entity, otherwise you’ll get smashed on foreign exchange rates,” Phil says.
“So, the decision to go with Mason Stevens was based on its international currency capability. As a provider, Mason Stevens was able to offer us that unique capability of being able to sell an international stock and leave the cash in that currency. And for us, that was a massive issue.”
Phil doesn’t sugar coat the fact that once Mason Stevens was selected as Cutcher & Neale’s managed accounts provider, it was a massive undertaking to implement the service within the business.
Phil and his team is currently in the process of meeting with every client to explain the new managed accounts service. But what’s been interesting for Phil is how well clients have responded to the offering.
“They actually ‘get’ it,” Phil says. “They understand that under our previous arrangement, there was a delay between us making a decision, then us getting in contact with them, and then getting their approval, and then us implementing that decision.
“Clients understand that this delay in transacting is inefficient and costly, because we can’t move at the speed we want to in order to implement a decision. So, clients ‘get’ managed accounts, but it’s been – and continues to be – a big operation to move everyone over to our new managed accounts service.”
As Cutcher & Neale only uses direct assets, Phil believes having the capability to move quickly across a client’s total portfolio makes the MDA a perfect solution for the business. He says the key to managed accounts is speed and ease of the transaction process.
“Speed is not only important in getting into a stock but it’s also important in repositioning clients into cash, if, for example, we felt another GST was coming upon us. The fact is, there’s going to be another downturn somewhere along the line, so we want to be able to move quickly to protect our clients’ capital. And an MDA provides us with that ability.”
So, while clients “get” managed accounts, what about Phil’s planners and support staff? Do they ‘get’ it?
“Absolutely,” he says. “They got it straightaway and clearly understood the benefits, cost efficiencies and time savings that managed accounts is bringing to the business. They want to be more nimble and spend more time in front of clients, rather than being bound up by the administrative burden of an IMA.
“So, our new managed accounts service is freeing up their time significantly.”
Cutcher & Neale’s new managed accounts service offers a top-down model approach – High Growth, Growth, Balanced and Conservative – as well as any combination of Australian equities, international equities, fixed income, property and what Phil calls, an “opportunities” category for non-mainstream investments.
“The fixed income category is also a segment in which Mason Stevens brings something to the table for us, as well,” Phil says. “Mason Stevens has got a far more sophisticated fixed income capability, which we currently don’t have. That’s giving us access to the corporate and government bond markets, which we’ve never really been able to access before.”
And what of the firm’s investment committee?
Currently, it consists of seven members, comprising Phil and four of his planners, a compliance officer and an investment specialist from Mason Stevens.
“We research the underlying themes we want to have in our portfolios and potential stock selection, which as a committee, we discuss together.
“Mason Stevens also provides us with one of its investment specialists to participate on our investment committee. So, one month we might have the Mason Stevens fixed income specialist sit in on the committee, and then the next time it could be an equities or economics specialist,” Phil says. “I’m happy to have Mason Stevens’ expertise on our committee.”
Cutcher & Neale is currently bedding down its managed accounts service but it expects to have about 350-380 clients operating under its MDA structure. The clients typically have portfolio balances over $1 million and favour the transparency of direct equities.
“If you’ve got an investment portfolio, you want to know where it’s invested,” Phil says. “Our clients want to know where their money is invested and why it’s invested there – to the cent. That’s important for them. And that’s where client communication kicks in.”
In fact, Cutcher & Neale takes client communication very seriously.
“I believe one of the key issues facing the financial advisory profession is the failure of planners to communicate with clients. But ironically, that’s working in our favour, as we’re seeing many new clients coming to us as a result of this.”
As part of its client communication strategy, Cutcher & Neale publishes Morning Market Update – an in-house daily report that is sent to clients five mornings each week. The update informs clients about what’s happened to local and overseas markets overnight.
“In addition, the last part of the Morning Market Update is what we call ‘CNIS Perspective’. This is an opinion piece about what the investment services team is thinking about at the macro economic level, like what’s happening with the dollar or employment, or what’s happening with specific global issues, like Brexit or the US economy.”
The investment services team takes it in turn to write the nuts and bolts of the report, with Phil rolling up his sleeves to write the ‘CNIS Perspective’ part of the bulletin.
“Therefore, when we’re talking to clients about a stock specific recommendation, they already know what our mindset is with regard to certain issues, like the dollar or interest rates or what sectors we want to be invested in. That’s because we’ve expressed our views in our daily client report.”
But is a daily report for clients information overload?
“Not so,” says Phil. “Clients genuinely see value in the report. While the report is somewhat onerous to do each day, our clients have a lot of money invested with us and seek reassurance that their money is being well managed. In fact, if we’re late sending out the report, we soon get emails wanting to know where it is!”
Recently, Phil wrote about the 30-year anniversary of the 1987 stock market crash. He finished his opinion piece by saying the crash taught investors to never be afraid to take profit and sit in cash.
“That’s the type of material I want our clients to be aware of. It’s important to remind them that we’re not ‘gung-ho’ all the time, and there are times when it’s appropriate to be conservative.”
Having only recently undertaken the challenging process of implementing a managed account service within the business, is there anything Phil would do differently?
“Seriously, I should have done it years ago,” he says. “But as I said, the technology and capability for what we wanted to do with currency on our international portfolios, wasn’t available back then.
“But, if I was starting out right now, I definitely wouldn’t go IMA. Instead, I’d go straight to the MDA environment.
“Businesses need to realise that the transition process to managed accounts does take a fair bit of time, but it’s a great opportunity to get in front of clients, talk to them about the service and engage with them.”
With the heavy lifting already done in transitioning to an MDA offering, Phil is genuinely excited by the prospect of Cutcher & Neale’s investment services business becoming less administrative and more incisive of macro economic issues in relation to its investment decisions.
“Our new managed accounts service means we won’t be bombarding our clients with the mountain of paperwork that SOAs and ROAs produce, which is definitely a good thing. Instead, we’ll have more time to analyse client portfolios and their asset allocations, and be talking to clients about this,” Phil says.
“So, it’s a definite win-win for our clients and our staff.”