Pricing for value

Speaking at the IMAP Adviser Roadshow, Alan Kenny and Vincent O’Neill discussed value pricing in a business.

Q: Please describe your business and its value proposition.

Alan Kenny: At Ironbark Asset Management, we source best of breed managers from around the world and distribute them here in Australia. When it comes to managed accounts, we wear a couple of hats. One of these hats is as an underlying investment management in some portfolios. In some cases, we are the investment manager of the managed account. We also act as a responsible entity (RE).

Like any RE, we are in a unique position in that we have a lens across the entire value chain that links into managed accounts. So, as an RE, we have to be across all parts of the business and its offering, to allow us to understand what each part of the value chain is actually doing, what it’s charging, and whether value is actually being delivered.

We believe managed accounts are delivering a huge amount of value for advice businesses, particularly for those businesses that are moving from just running model portfolios to offering a financial product. It’s a massive change of focus for these businesses, which now includes a fiduciary role.

One thing that gives us comfort around the value chain is that for advice businesses that are starting to move down this model, it forces them to really look at their client base. They could have 20 to 25 model portfolios that are all configured for different permutations of clients, but when you start designing a financial product, you actually have to condense that down because it’s quite inefficient to have that many portfolios.

So, it really focuses your thinking on what is the value of my service to clients and what is the best solution for them.

Vincent O’Neill: Stanford Brown has over 30 years’ experience as a specialist private wealth business. We approached managed accounts about six years ago, as a result of identifying inefficiencies in the traditional way of doing things.

We looked at the established financial planning model in terms of money management and could see the inefficiencies in that. For example, regardless of how skilled an investment committee was in making investment decisions, when a client eventually had that investment decision implemented, largely depended on when they actually met with their adviser, and not when the investment decision was made by the investment committee.

We went through the process of identifying the different areas of value-add in our business, and knew there had to be a more efficient way of running the money. 

That led us to consider whether we had the expertise to do this, or whether we needed to bring this expertise in-house, or whether we wanted to partner with another player. We eventually made the decision to bring in a Chief Investment Officer, Ashley Owen. By doing so, we were able to build a specialist money management offering around that, which enabled us to take our offering to the next level.

However, what did this mean for existing advisers and their discussions with clients? We understood that a managed account offering could potentially be threatening to advisers, if they positioned themselves to be the investment expert with their clients. 

We started very early on with a communication strategy with our clients and advisers about where the business was heading and the changes that would be implemented.

From this point, we rebuilt and redefined out advice offering by clearly separating out the money management aspect of our business from the advice process.

Q: By implementing your managed accounts offering, how did you communicate the change with your clients and get them to accept it?

VO: Our approach was to start the client communication piece as early as possible – both for internal advisers and for clients.

The one mistake I probably made in leading this project was starting our communication strategy almost too early. We started talking to our clients about the efficiency of doing things and the loss of some of their discretion around investments. We wanted to be very upfront with our clients about this and explain that managed accounts weren’t for everyone.

However, we got to a stage where our clients were quite eager to go down the managed accounts path, but we were still trying to get all our processes in place.

We are quite fortunate at Stanford Brown in that we are a single office business and we have a tight adviser group who strongly believe in our investment philosophy. So, by properly educating and resourcing our advisers, they have had no objection to our move to managed accounts.

Probably the area where our advisers have needed the most help was with assistance with articulating the value of managed accounts with their clients.

Q: What are the challenges when rolling out a managed accounts solution for licensees?

AK: Our conversation with licensees is about helping them make good decisions around structuring investments, and primarily, this is about whether managed accounts is the right solution for their business.

We have licensees who have the same need, which is to design professional-grade investment solutions – we call them multi-asset solutions. We’re quite agnostic as to what constraint that takes. We also point out that the right solution for a business doesn’t have to be a managed account. It could be a managed fund or it could be an MDA.

But at the heart of the conversation we have with our clients is around building the right governance, and making sure it is fit for purpose for their clients.

For example, we have clients who started this journey five years ago, prior to many of today’s mainstream managed account solutions being available. Back then, they decided to go down the managed fund path.

However, groups that we are talking to today are still thinking about ‘paths’, and the managed fund versus managed account path is still relevant to them. Ultimately, it all comes down to the client. What are clients looking for and what type of structure is most suitable for them?

For example, a group that decides to go down the managed fund path might choose to do so, purely because it’s a simpler proposition to explain to clients.

So, when we’re thinking about value and solutions that allow practices to build leading investment capabilities that are designed to deliver on client outcomes, then the needs of clients must be front-of-mind.

Q: Why would a licensee choose a managed account provider rather than become the RE?

AK: Most licensees don’t have the capacity to be the RE. So, for them, the decision becomes: Do I use the in-house RE of the platform or do I use an external RE?

For many of our clients, it’s about creating separation. Having that separation between the platform and the provider of the managed account and having an external RE, helps with managing conflicts.

VO: Stanford Brown went through that same exercise a number of years ago. We were considering the options of MDA versus managed accounts. From an advice business perspective, we definitely considered that if we did go for an MDA, what would be the implications for things like PI insurance?

MDAs and managed accounts are very different structures and the RE wears a lot of the responsibility. If you want to bring certain things in-house, you’re actually bringing in a lot of the risks that go with that. So, it’s really worth doing your homework early on.

I also believe it’s about understanding what you want to get out of the structure for the client. For example, a managed fund might give you more flexibility in terms of investments. Whereas for  clients who want more transparency and flexibility with their portfolio, and who want to own the underlying assets, then that’s where a managed account is more suitable.

You really do need to understand the options available. The ability to do this in-house without any external expertise is challenging but there are a lot of providers available today that can help practices build this type of offering.

AK: We’re also finding that there are more and more advisory businesses with books across multiple platforms. So, for businesses either in acquisition mode or looking to break away from institutional ownership, they are thinking about what type of platform they need for their current clients and future clients.

One of the reasons practices come to Ironbark instead of opting for an in-house RE, is they have a desire to build a uniform solution that sits across multiple platforms – and that’s managed accounts. A managed account provides them with a single investment committee and a single process to define portfolios, which is implemented across multiple portfolios to drive business efficiency.

Q: Client rebates are a way of reducing the overall cost of the managed account. What do you see as the various roles and responsibilities of the licensee, investment manager, the RE and platform in relation to this?

VO: The RE needs to make sure that the overall fee load is reasonable, so there is potential there to add value for the client. 

From Stanford Brown’s perspective, we know we’re under fee pressure in this industry and particularly on the money management side of what we do. There’s a significant focus on fees, driven largely by the media.

When we were first looking at managed accounts, Stanford Brown had reasonable scale. We had over $1.3 billion in assets under management. We wanted to leverage that scale with the fund managers and push for client rebates. However, at best, we had modest traction doing this.

But today, things have changed. Fund managers are now very aware of fee pressure.

The traditional model where fund managers would charge large fees for active management is waning. Instead, they are more willing to do one of two things: to provide us with a rebate, which we pass directly onto the client, or provide a more customised version of the fund for you, which could be zero fees with a performance fee for an active manager when they have added value to the fund.

We like Allan Gray’s new Class B that has recently been launched, where the fund manager will back itself by not taking an ongoing MER. They will just take a performance fee.

So, our key rule is to leverage as much as possible to get these fees as competitive as they can be.  

AK: Rebates is a great example of the value chain working together. If you go back a couple of years, rebates were primarily on a platform level at around 10bps – and you were lucky if you got that.

What we’re seeing with the move by advisory businesses to managed accounts is scale and therefore being able to negotiate. We use our scale as an RE and a fund manager, with broad relationships with our clients, to negotiate fairly compelling rates. 

When you look at practices that moved from running model portfolios to a financial product, it’s more expensive because you are adding on an RE fee level on top of that, possibly a platform admin fee layer on top of that as well. So, rebates are absolutely essential.

But it’s not just about rebates. When you’re moving clients from direct equities into a managed account structure, the fee goes up because you are putting in place professional asset management. That’s where the benefit of scale kicks in, by allowing you to go to fund managers and negotiate a mandate. 

Q: How clear are you in discussing fee rebates with your clients?

VO: We openly talk about it. Obviously, disclosure is the key when talking about fees. We built it into our cost disclosure in our SOAs. It’s like any message, in order for people to understand what it is you’re saying, you need to repeat the message – and that’s what we’re doing.

Because of the media bias around fees, particularly post Royal Commission, we just need to keep sharing the message that we are actively pushing to reduce costs.

Q: There is an inherent conflict of interest if you are associated with a product that is offered by the licensee, whether it be a direct equity relationship or otherwise. How does your business manage conflicts of interest?

VO: Interestingly, Stanford Brown looked at the historical way of doing things and tried to find a better way of doing it, but like so many other advice businesses, we were suddenly sitting across the table from the lawyers who were telling us we had a product and we had to manage it accordingly.

From a business perspective, trying to eliminate all conflicts of interest is probably more ideological than practical. The key for us is recognising that conflicts are there in the business and  then working out how to manage them.

We’ve been evolving our approach to managing conflicts over a number of years. Obviously, the most simple things are around how you build your adviser remuneration models. You don’t want to have anything there that is incentivising incorrect behaviours.

We have built a very clear fee methodology. In fact, we charge our clients less if they are using the managed account because it brings certain efficiencies to the business, which we build into our charging model. But if a client is wanting something that is more labour intensive, then they pay for that. We also have very good compliance around how our advisers document and record their advice.

I think the area of managing conflicts of interest is moving quite quickly, particularly in respect to what is considered best practice. As a business, you need to ensure that you are properly identifying the conflicts in the business. You need to adequately disclose those conflicts, and ensure that your advisers’ client file notes are kept up-to-date.

Q: As an RE, what gives you comfort that value is being provided in the investment management function when you are dealing with particular licensees?

AK: We are a very active RE. For every client we work with, we work very closely with them from the start, which includes designing their solution and bringing it to the marketplace.

We focus on the due diligence and the governance that has to be designed around the investment committee. We work closely with the investment committee in relation to the appointment of the asset consultant. We also put very tight mandates around what the model manager can do.

We take an active role because something like moving from a model portfolio to a financial product is a big change for an advice business, which requires a process of education and governance around that.

As an active RE, part of our requirement is to be appointed to the investment committee as a voting member. However, that’s not to second guess investment decisions. Instead, it’s to provide operational day-to-day governance support to the investment committee.

As an RE, we care about how the product is run. We care that the right processes are being followed. So, our role on the investment committee is not only voting on matters, but ensuring the the right processes are being followed in making decisions around investments. 

Q: In terms of value, what’s your view on fee pricing?

VO: At Stanford Brown, we start at a total cost of client. In the early days, we knew that if we were going to charge an investment management fee, then we had to provide clients with demonstrable value-add.

As a business, you need to ask yourself: what is your value proposition from an investment perspective; are you selecting managers; are you doing active asset allocation; are you negotiating with fund managers? Essentially, what are the different pieces you are providing to the client that adds value and can you justify it?

We are conscious of the downward pressure on fees, so we initially built models that were a blend of using active and passive management. As an investment manager, we will take quite significant positions or off-benchmark positions when we feel it’s right from an asset allocation perspective. By doing so, in return for some of the performance we deliver, we felt we were entitled to add a fee.

But we are also conscious that for some clients, it’s the total fee load that is almost the only thing they care about. So, we have developed and launched in late 2018, a ‘sister suite’ of models that were built purely out of passive managers. And while we still do active asset allocation over the top, implementation is through passive instruments.

AK: If you go back to price and value, the keyword missing from this is ‘substance’. Is there substance behind what’s being charged for and the services being provided to the client?

You only need to look at quality advice businesses that are running investment committees. You look at the work they are putting into really thinking about their investment proposition and setting up the right governance structure. In such examples, you can honestly say there is substance behind what they are doing.

Q: In relation to ongoing service, where do you think the industry is heading?

VO: We’re moving to an age where value is held in information that wasn’t freely available in the past. So, the value an adviser offered to a client was their knowledge, which was not available to the client. But that type of value is declining due to the availability now of information through mediums like the internet.   

However, there are still huge opportunities for advisers who do provide incredible value to clients.  At Stanford Brown, we are incredibly passionate and are strong believers in the value of advice. This requires businesses to be quite clear about what they are doing with their clients and sharing this back to them.

The future of ongoing service is about helping to ensure clients are on track. It’s about ensuring your clients make the right decisions with their investments and financial future. By focusing on the little things, as well as the big things, we’re providing clients with peace-of-mind when it comes to their finances.

There’s a whole new generation of advisers who believe in this future of advice.

AK: One of the benefits of having an in-house product is the intimacy it provides you and the client with. So, when it comes to having an in-house solution, advice becomes even more critical. For an adviser, that transparency and understanding around the investment process for an in-house product is much deeper than perhaps an external product. So, that makes ongoing advice even more critical.

Alan Kenny is Head of Client Solutions at Ironbark Asset Management and Vincent O’Neill is Head of the Private Wealth Division at Stanford Brown.

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