Stanford Brown’s adoption of managed accounts has radically changed the way we service our clients. There were four key issues that prompted us to go down the managed accounts path. They were:

1. Speed: Our investment committee would meet monthly, we would make our decisions, we would communicate those decisions to our advisers and then they would roll those decisions out to clients, depending on when they would next meet them. As we typically see most of our clients twice or three times a year, that meant the wait could have been six months between making a decision and executing it. It was an old-fashioned and sluggish way of doing things.

So, speed was our number one concern that we wanted to address. We wanted to introduce a much more efficient way of rolling out investment committee decisions.

2. Administration: Our back-office was growing significantly. Trade errors were starting to come out and corporate actions were a nightmare. We had reached the ceiling of what we could administratively cope with.
3. Consistency: We were looking for a more consistent approach to how we managed portfolios and did business.
4. Client engagement: Our advisers had a close relationship with their clients. Typically, they got so wrapped up talking to their clients about particular stocks and funds that we realised it were the advisers who really cared the most about these stocks and funds, whereas our clients really didn’t care. However, our advisers convinced themselves that their clients did care, only later discovering how little they really did care.

We realised that clients didn’t come to us to discuss what the fund manager was putting their money into. They came to us because they didn’t have enough time to invest their own money or they didn’t have the necessary skill set to invest their own money. But for those that did, then we would advise them to get an SMSF and do the investing themselves.

5 key benefits

Since implementing managed accounts into our business, the benefits have been enormous. The following are five of the key benefits to our business.

1. Proactive portfolio management  

We had been long the Australian dollar last year. When the dollar hit $0.80, it looked like it had peaked. That’s when we decided to go underweight Aussie dollar.

So, we executed that position. But, we didn’t do it by options or derivatives, we did it using Vanguard ETFs.  

We have a core satellite approach. We use more ETFs than active funds. But there are funds that do consistently add value over time, and with these funds, we give them ‘lock-up’ money. That is, we tell them that this is their money for, say, three years. We won’t pull that money out for one bad year, but if they have three, then we will review things.

The ‘satellite’ are the tracker funds. Vanguard has two: it has an unhedged international share fund (VGS) and it has a hedged international share fund (VGAD). We just flip one for the other, so you can suddenly go from being overweight in the Aussie dollar, to being underweight.

This means you can flick a switch on your platform and suddenly all our 490 clients on the platform are now underweight the Aussie dollar. It’s that quick, it’s that effective.

2. Equitable distribution of fees

Introducing managed accounts into your business doesn’t mean you’re adding another layer of fees for the client. In fact, I’d say it’s a more equitable distribution of those fees. We have a specific money management fee, we have an adviser fee and we’re sharing some of those fees with the fund managers.

Typically, if you engage a fund manager to run an SMA, they will run it at a lower cost than a managed fund, but there is a lot more room to negotiate on a managed fund if you have a managed account – and certainly, if you have scale.

But it’s important to note that managed accounts are not cheaper for your clients. It’s not a way to save your clients money. Instead, it’s about improved technology to run their portfolios.

3. Significantly reduced administration

As clients have now given us discretion to make trades on their behalf, there is now less need for ROAs and significantly reduced administration.

4. A consistent portfolio offering

Managed accounts enable us to have a consistent offering for our clients.

5. Advisers can advise once again

We launched our managed account offering in February 2017. This has enabled our advisers to actually advise again and not be money managers.

Advisers are not principally money managers. If you look at designations like the CFP® Certification, they are not money management qualifications. Financial planners are not geared to pick stocks, understand correlation and diversification challenges, and understand option pricing theory. It’s not what they should be doing.

So, at Stanford Brown, our advisers are advising again, and they’re really enjoying that. 

The Lunar Managed Account

The following is a snapshot of Stanford Brown’s Lunar Managed Account that we launched early in 2017.

We have five models – from conservative to high growth – and we are introducing low cost ETF-only models.

The five models are managed by a very experienced investment committee of five. Indeed, for businesses thinking about going down the managed account path, the type of investment committee you go with is critical.

So, one of the biggest decisions for businesses is: Do you want to be your investment committee or do you want to outsource it to a specialist? That’s an important decision the business needs to make.

With our managed account, we have twice the ability to de-risk as we have to go up, and that’s mandated. For example, if our client risk profiles are moderate, say 50/50, and we’re maximum bullish on markets, we can go up to 65 per cent on growth assets. If we’re maximum bearish on markets, we can go down to 20 per cent. For us, it’s about meaningful dynamic asset allocation and particularly on the downside.

Our managed account uses a mix of ETFs (about 60 per cent), active managers and some direct investments.

However, as a word of warning, managed accounts don’t do illiquid assets very well. I think the next evolutionary wave of technology might fix that, but as it stands, one month settled assets are a bit of a problem for most managed accounts.

So, I believe our Lunar Managed Account offers value in three places, which are:

• dynamic asset allocation;
• manager selection; and
• quarterly rebalancing.

18 months later…

So, it’s been almost 18 months since Stanford Brown introduced managed accounts to the business, and the reaction from advisers and clients has been interesting.

Surprisingly, managed accounts hasn’t suited all our advisers. We have 15 advisers, ranging from those who love the money management aspect of the advice process and believe they provide plenty of value to the client, to those who have no interest in the money management side of the advice process and are happy to delegate that aspect to a specialist.

So, on that spectrum, there were advisers who strongly resisted managed accounts, believing they’ll have less scope to recommend changes to their clients.  

However, as an important point, our managed account offering doesn’t comprise 100 per cent of our clients’ portfolios. It represents about 70 per cent and we tailor the rest according to the client’s situation. So, for most of our client portfolios, the core component is now the managed account.

Another thing that our advisers find incredibly confronting with managed accounts is the transparency of performance. So, every single basis point is now accounted for. We also benchmark our performance to the Vanguard index and CPI.

So, while not all of our advisers love managed accounts, they are learning to love them. That’s because the most important part of the equation – our clients – love them.

In terms of improvements to our administration and paraplanning, managed accounts have been fantastic. Our administration team had been growing, which was quite concerning, but with the implementation of our managed account offering, that has stopped.

And we are now providing a consistent, professionally managed investment offering. So, if you’re in a balanced risk profile, you will have a very similar portfolio to someone else of your age and risk profile.

What has been particularly gratifying to see is the reaction of our clients to our managed accounts offering.

When we initially made the decision to go down the managed accounts path, we met with clients to explain our reasons for doing this and the benefits for them. Naturally, we were expecting our clients to embrace this wonderful new technology, but they didn’t. We were faced with resistance by clients.

Clients were concerned that we were going to make changes to their portfolio without telling them. So, for a lot of our clients, that was quite a confronting concept. But after a concerted client communication campaign, we won our clients over.

In the end, it all came down to trust. Our clients did trust us to make discretionary decisions on their behalf.

And, to an extent, we’ve also been lucky. That’s because when we launched our managed account offering in February 2017, it was a bumper year for markets, with every asset class going up and performing exactly as expected.

For example, the Lunar High Growth model returned 14 per cent last year. So, we had a wonderful first year performance across our Lunar portfolios, and with that has come a lot more client trust.

So, my final advice to anybody making this transition to managed accounts is that this journey requires a lot of explanation and communication with your clients and staff. Stay close to them and be consistent in your messaging to them.

Top 7 tips

The following are some handy tips for any business looking to roll out a managed account offering.

1. Do a lot of research. This includes talking to other businesses and platform providers.
2. Appoint an internal person to champion the transition process to managed accounts.
3. Test and trial everything.
4. Decide whether you want to establish your own internal investment committee or outsource it.
5. If you go down the internal investment committee path, then work out what your investment philosophy is.
6. Position the switch to your clients and your team – over and over again. You need to repeatedly communicate this move with your clients and staff, because people forget and it is confronting for clients to give up control of their portfolios.
7. Don’t underestimate the resources you will need to successfully roll out this offering.

Jonathan Hoyle is chief executive officer at Stanford Brown.