Patrick Nalty CFP® first dipped his toe into the world of managed accounts eight years ago, seven years after he founded the Paradigm Group with James Mirams. Back then, Patrick knew there had to be a better way to provide a tailored solution to the investment needs of clients – a solution that was designed to support a proactive investment approach designed to deliver a better client experience, whilst also delivering administrative efficiencies to the business.

The answer was managed accounts.

Today, Patrick and James retain ownership of the privately owned boutique financial services business based in Melbourne, with Patrick maintaining a hands-on approach in its daily operation as managing director of Paradigm.

He proudly sees the business as being an early innovator in the use of “next-generation” MDA technology to deliver clients with the advantages of direct investment ownership, combined with the benefits of professional and proactive investment management.

“When we set up our MDA offering eight years ago, we were the early adopters. We knew then, as we know now, there had to be a better way of managing client portfolios,” Patrick says.

“Back then, we were faced with two problems. Prior to the GFC, we were concerned that markets were peaking but in order to change any of our clients’ investments, we had to either do an SOA or an ROA and get the client’s approval to change the investments.

“So, if we wanted to shorten our position in Australian equities, we had to get the client’s approval to do that. But a lot of our clients were semi-retired and travelled a lot, which made it difficult to contact them. In addition, given we have always been passionate about the benefit to clients of the direct ownership of assets, it was a hugely onerous task to work through your entire client base in order to get the proper authorisations to change a client’s investments.”

Another issue that steered Paradigm down the managed accounts path was the complexity, time limitations and manual input that came with managing the investments of clients.

“As we were doing direct equities, fixed interest and listed property, if we had a corporate action, we would receive voluminous amounts of mail that were full of PDS’s on the corporate action. It was a very cumbersome way of managing our clients’ affairs, and also increased the possibility that clients were not available or could not respond in the timeframe required,” he says.

“So, we thought there had to be a better way of doing things to ensure the actions required to achieve the best interests of clients could be carried out efficiently. After a lot of research, we realised that the MDA environment, where clients provide discretion for the management of their investment portfolios, was the right way to go.”

Three pillars of implementation

Eight years on, Patrick doesn’t regret being “a little bit smarter” by moving his business into the MDA environment, but admits it’s a journey not suited to all planning businesses.

“Managed accounts deliver a lot of tightness to your processes,” he says. “The efficiency gains are considerable but it’s not an easy process to undertake. You really need to take a solid look at your clients and your business, and work out what clients will benefit most, and how you’re going to transition the appropriate clients to the MDA service.”

Before rolling out a managed account service, Patrick recommends businesses carefully consider, what he believes to be, the three pillars in the implementation process of a managed account offering. They are:

• the investment process;
• the communications process; and
• the transition process.

1. Investment process

According to Patrick, by going down the managed account path, a planning business is effectively becoming the investment manager, which means having to formulate an investment committee, whether internally or externally, for the investment decisions.

“We wanted to operate in a way that was similar to a mini-industry fund,” Patrick says. “So, we have an administrator in our managed account provider and we have an independent investment committee that takes a macro economic view and determines strategic and tactical asset allocations appropriate to the various risk profiles that apply across the client base. The investment committee is also responsible for appointing ‘best of breed’ asset class specialists under strict criteria and controls, to run our asset class based mandated model portfolios.”

Patrick says clients remain very engaged in the investment process because they retain beneficial ownership of their assets and have full and transparent view of the portfolio activity, including purchases, sales and corporate actions. But he adds the overall investment process remains externally managed by asset class specialists whose role it is to manage that specific asset class in the very best interest of clients through the mandate provided to them by the Paradigm investment committee.

“By adopting this approach, Paradigm as a business can fundamentally focus on the client relationships and we mitigate any perceived conflicts of interest because the investment management process is actually outsourced to individual specialist managers.”

He also adds that as part of the investment process, businesses need to engage closely with their PI insurer, to make sure the insurer understands and feels comfortable about what the business is doing.

2. Communication process

Secondly, Patrick adds that the communications process is very important when implementing a managed account service and for providing ongoing tailored solutions for clients.

He concedes that Paradigm did initially have reservations about seeking client discretion over their portfolios, but as clients already trusted the business, this actually didn’t prove to be a problem.

“There absolutely needs to be a degree of trust by clients to go into managed accounts,” Patrick says. “However, even with this trust, it was still a lot of hard work to transition over. A lot of clients were in individual HINs (holder identification numbers), so we had to transfer them all over. We had to do a lot of hard work transferring, redeeming and restructuring the existing investments and moving them to the new custody arrangement and the new individual managers.”

Patrick firmly believes the trick to making any new business endeavour successful is clear communication and lots of it. Interestingly, Paradigm is currently looking to appoint a dedicated communications person, who will be responsible for providing “discreet” communication with clients when there are changes to their portfolios.

“When it comes to communicating with our clients, we’re working towards ‘push notification’ through devices like smartphones,” Patrick says. “Technological innovation is becoming increasingly important, and will enable us to interact much more efficiently with our clients in a real-time environment.”

3. Transition process

When implementing a managed accounts strategy, Patrick says businesses need to carefully consider what providers to partner with.

“Take your time in finding the right provider for your business and make sure they are investing in their technology and capabilities,” he says.

In terms of technology choice, Paradigm currently uses XPlan as its lead CRM, Class for its SMSF administration, and managedaccounts.com.au for driving Paradigm’s MDA technology.

However, he concedes that the business is currently reviewing its technology providers.

“Since we got into managed accounts eight years ago, there’s been a significant investment by providers in technology. Managed accounts is very much a technology play, so we’re in discussions with a number of providers about their offering and the advancements they’ve made in technology over the last couple of years.”

As an example, Patrick is looking for technology that will automatically rebalance portfolios when investment managers make decisions or companies initiate a corporate action.

“Managed accounts bring a lot of tightness into your processes. The efficiency gains are significant but it’s not an easy process to undertake, so you need to take the time to get all your processes in place,” he says.

Paradigm Managed Account Service

Today, Paradigm manages approximately $300 million in its managed account service, with the average client balance size being $1.2 million.

“Paradigm has a couple of hundred million dollars worth of funds under management spread across other platforms not in the MDA,” Patrick says.

“Our preferred minimum investment into the managed account is $500,000. We’re not trying to be all things to all people. Clients who we deem not to be financially sophisticated or savvy, and may not be comfortable with direct investments, are catered for in the retail environment via a wrap account.”

Patrick adds that Paradigm is currently investigating implementing a retail MDA offering, which will sit under one of the managed account providers’ IDPS services. This structure will provide a low cost solution using investments such as ETFs and LICs.

“Because Paradigm has become very good at managing clients’ money, we find that we’re attracting clients who have substantially greater wealth. They like the way we run our portfolios with our specialist managers and investment committee. So, it’s working out quite well.”

The Paradigm Managed Account Service (PMAS) is an investment portfolio service that provides its clients with choice and flexibility without the ongoing administrative burden.

Clients can invest across a range of asset class based model portfolios – all managed by specialist investment managers. These include: Australian shares, international shares, listed property, fixed interest and alternative assets. In addition, clients can benefit from a separate model called the Transition Portfolio.

“The Transition Portfolio is used by clients as a ‘holding’ portfolio, for example, for shares that may have been bequeathed to them that fall outside their portfolios that they wish to retain or where activity may be constricted by significant capital gains implications,” Patrick says.  

He adds the PMAS is open to individual investors, corporate clients, family trusts, self-managed superannuation funds, charities and endowment funds. While most investors in the PMAS also receive financial advice from Paradigm, the service is available for those who just want to invest without advice.

Looking back, looking forward

So, what changes does Patrick anticipate over the next 5-10 years to Paradigm’s service offering?

Firstly, he doesn’t rule out the acquisition of advisers and practices that might enhance the business’s capabilities.

“The compliance side of managing portfolios and clients’ investments is getting quite tricky. There are a number of smaller practices we’re currently talking to in regards to either acquiring or partially acquiring. By doing so, we can provide their clients with a more sophisticated and robust investment approach, whilst providing those practices with significant efficiencies by adopting an MDA within their business,” Patrick says.

“It’s a very efficient way of managing portfolios if you do what Paradigm has done, like outsource the administration, outsource the investment committee and outsource the mandates.”

And as Paradigm grows, he suggests that the business will probably have to appoint a full-time person to look after the compliance side of the business; to maintain the strong compliance culture across a broader organisational structure.

“I think compliance is a big issue going forward. For anybody contemplating running a managed account offering, you’ve got to make sure you’re running a strict compliance regime. That includes knowing how to manage any conflicts of interest and knowing how to manage your portfolios in a professional manner.”

But it’s technological innovation that Patrick sees as being the real definer for businesses moving forward.

“You’ll need technology that’s going to be able to talk to an app to enable clients to track their investment portfolios. Research shows that people searching for information today are increasingly moving away from their iPads and computers, and are using their smartphones instead.

“So, everything we’ll be doing going forward will be based on using technology to its best advantage, enabling us to engage with clients efficiently.”

And what about professional alliances?

He views accountants as being a real opportunity for the business.

“For wealthier clients, we see the accountant as being their primary adviser. But accountants really don’t have the ability to manage money very well; they don’t either have the skills, the expertise or the licence to do that. So, we want to be in a position to work with accountants who want to provide their clients with a professional outcome on their investment management.”

Worth the effort

With eight years under his belt offering clients a managed account service, what advice does Patrick have for any business looking at rolling out their own offering?

“Take the time to plan. It’s a massive undertaking to transfer clients across to a new custodial arrangement and a new administration platform. So, my advice is to make sure you’re working with a good provider that’s got plenty of resources and the right investment philosophy to help you make the transition.”

But does that mean scale is critical for any business wanting to roll out its own managed account service?

“Put it this way,” Patrick says. “You can’t do the work to transfer your clients into the new world without a fair bit of internal back-office grunt support from within your organisation. So, if you haven’t got that, it’s going to be problematic, unless you’ve got a provider that is willing to throw its resources to the task of transitioning.”

But never underestimating the amount of hard work involved in moving to an MDA environment, Patrick looks back now and admits it’s been worth all the pain and effort involved.

“I can honestly say, it’s enhanced our clients’ experience, and has made our business so much more efficient.”