Goals-based advice and managed accounts

What is goals-based advice?

Rebecca Jacques: Goals-based investing is about the personalisation of investment management. Goals-based advice links a client’s individual goals directly to the design of their portfolios, so the likelihood of achieving those goals is improved.

The traditional approach to building a portfolio is to use risk profiling to match a client’s investment risk tolerance to a strategic asset allocation benchmark, which by definition is more backwards-looking and static in nature.

Goals-based advice is different. It seeks to look forward – using a more flexible portfolio design methodology and dynamic asset allocation. The primary aim is to achieve a specific outcome or goal. It may be to achieve a real return objective (i.e. above cash or inflation) over a given time period. It may be to manage ‘risk’ within certain parameters. It may be to ensure that capital is available at a specific point in time by using liability matching or liability driven investing.

Regardless of what the primary driver of a portfolio may be, there is usually a strong focus on downside risk protection. Indeed, there are many ways to provide goals-based advice depending on a client’s different circumstances.

Rebecca Jacques: How did you go about implementing goals-based advice into your practice?

Gareth Jakeman: We left a major licensee in July 2016. I no longer wanted to run the type of business I had been operating for the past 15 years. So, when we were thinking about the whole concept of goals-based advice – and every planner does goals-based advice, but in slightly different ways – we started to think about it from a business perspective, and how we could deliver the best execution of our ideas for the benefit of our clients.

Typically, when clients use a planner, they are seeking your expertise and naturally assume you are technically competent. So, 30 per cent of the fee you are charging them as a planner is for technical competence, while 70 per cent is for the relationship. But when I thought about what I was doing in our advice business and all the inefficiencies that were in there, it made me think about how I could increase the time I spent on the business to execute best practice ideas.  

The reason we rolled out goals-based advice with our managed account offering was partly due to transparency. It certainly allowed us to operate in a multi-currency environment. It was also about being able to make decisions efficiently and quickly, which is why you have a managed accounts solution in the first place.

We had to work out where we had internal capabilities and where we had to outsource. Part of that exercise was talking to Mason Stevens and to leverage some of their internal capabilities, whilst outsourcing to some other managers. We also started an investment committee and put in place a governance process.

So, because we are a small licensee, we needed to outsource some of our capabilities where we didn’t have them in-house. That’s absolutely essential, because you are looking after clients’ money.

Thomas Bignill: And that’s important. Outsource if you don’t have the in-house capability, and none more so than an investment committee. For managed accounts and goals-based advice, this is where it all starts, whether it be asset allocation or different asset class experiences, or whatever the case may be. To have a well-rounded investment committee is vital, as it enables you to manage from an asset allocation and manager selection basis.

RJ: For many planners going down the path of personalising the investment management process into goals-based investing, how many portfolios should they end up with and is each solution customisable? How did you approach this and what were some of your key learnings?

GJ: Our investment portfolios are divided into managed accounts that deal with a specific risk profile for a specific timeframe. The reason for doing so was twofold.

Firstly, it went to the heart of the way we talk to our clients in a meeting. Planners know that one of the things you talk to a client about is cashflow and how much the client is going to spend over the next 12 months, particularly if they are in the retirement phase. That’s money they don’t want to take any risk on.

So, we created bucket portfolios. Cash was bucket number one. Low volatility was our second bucket.

The rough science behind this relates to the GFC and not wanting to repeat investment mistakes. As part of our client conversation, we would say: ‘We’re going to look after your next 12 months’ worth of spending in the cash bucket, but then we want to take a separate amount and put it in the low volatility bucket, which is your next four years of spending.’

We actually then take that spending over the next five years and, indeed, over the client’s life expectancy. This is netted out for inflation. We then work out how much capital the client will need over that period, and that’s how we allocate into the different buckets.

One of the things we wanted to emphasise to clients, particularly coming out of the experience of the GFC, was that from an industry perspective, clients who tended to do better weren’t in a position where they needed to sell down good assets at a bad time (i.e. managing sequencing risk). So, one of the very important parts of our offering was being able to actually separate investments and allocate into those buckets, thereby managing sequencing risk. This enabled us to then have ongoing conversations with clients about their goals around specific timeframes.   

In our conversations with clients, we talk about things like the amount of capital they want to protect. This includes how much money does the client want to leave to the kids (apart from the house) when they die. This starts you talking about some of the important planning items that really develops the deep hooks of the planner/client relationship, and ensures that the planner has a long-lasting relationship with their client.

So, part of our planner developed managed accounts solution was to make sure that our process was designed in such a way that it incorporated the investment outcome. We were thinking about what was the client experience, what were the hooks that were going to make our client relationship deep and long-lasting, and how do we deliver that in an institutionally robust way.  

RJ: How did you go about engaging with your planners to bring them along with you on this goals-based advice journey?

GJ: Along with my business partner, we had our first goals-based advice professional development session with our planners. Their initial reaction was, ‘What am I going to do?’. So, here was the first problem; they were thinking about themselves, not the client.

Then we had to go through the process of saying it’s not actually that much different to what you’ve being doing before. But it was a challenging process because, by nature, humans don’t like change. So, for some of our planners to change the way they now have their advice conversation with clients, even though it was slightly different, was a challenge.

All up, we’ve spent about 12 months with this process, which is ongoing. As part of this, we have spent 9-10 months where we really concentrated on educating our planners. And part of this was also getting our planners comfortable with the underlying investments and the bona fides of the investment managers that we have outsourced to.

RJ: How important is the back-office in delivering to your ‘buckets’ and ensuring that the planners are confident in your process?

GJ: It’s very important to understand the ability of your managed accounts provider to execute your investment strategy. And there are different components of that. If you are outsourcing some of the compliance and governance functions, then you need to know how they are going to support you in that regard.

Basically, it gets down to things like: how they press the button and execute the trade, how they deal with currency, and even little things like how much they are going to charge you when you’re crossing from A$ to US$. You’ve got to get down to that underlying detail and understand what you are buying.

You’ve also got to make sure that when the provider is telling you – ‘Yes, we can do that’ – it’s not a case of ‘sales writing cheques that operations can’t cash’. That’s really important.

TB: When we sat down and sketched out with Gareth and the team and the investment committee about what they wanted to do, there was a strong feeling about having a lot of it being direct – that is, investing across all the different direct underlying assets, where they could.

And of course, if you’re investing in SMA models and you have three or four asset classes – international equities, direct fixed income, Australian equities and so forth – you’re starting to look at buckets of 100 stocks. So, as you go across the asset class, you need to disseminate what you are going to invest in directly and what managed funds or ETFs you are going to use.

That took a bit of time to do, as we worked this through with the investment committee in respect to the outcomes it wanted.

So, execution is key and it’s critical, particularly with such an enormous emphasis on the growth of direct equities and direct international having that live capability.  

RJ: What has been your clients’ experience rolling out your goals-based advice business?

GJ: The feedback from our planners, once they got comfortable with the whole process of goals-based advice, has been excellent. And the feedback from clients was along the lines of: ‘Gareth, we trusted you when you said we were a balanced or a moderate profile, but we didn’t actually know what that meant.’

So, when we got down to talking about goals, and we broke it down into those risk profiles, and had a discussion around the amount of volatility they wanted to accept in the portfolio for a specific timeframe, and the outcomes we thought were reasonable over the period we were talking about, they were able to relate to the process a lot more easily. It’s easier to have conversations that focus less on the number that’s generated based on a ‘balance date’ for a particular point in time.

We’re also able to confidently talk about the income result that our particular portfolios are generating and that’s one of the benefits we have as a managed accounts manager, because managed accounts provide us with the visibility, speed of execution and the ability within our mandates to protect our clients when they need to be protected.

So, we designed our offering around client best interest. I would say, make sure you design a really good process around filtering clients from a best interest perspective, with processes that are robust and are not simply a ‘cookie-cutter’ approach for clients. You really need to make sure there are some strong best interest filters in place that will govern the process.

TB: You developed a strong communication strategy, which is critical from a managed accounts perspective, because you’ve got clients in different buckets. And so, regularly communicating to your clients, whether it’s monthly or quarterly or whatever that is, means there are no surprises for them from an investment standpoint. I think that’s very important.

GJ: Our communication strategy was also about making sure we didn’t overwhelm our clients by providing too much information, too soon. Our clients already trusted us and knew we had their best interest at heart.

One of the potential downsides of managed accounts is that you are giving clients absolute transparency in what’s happening, and this can be complicated for the client to understand. So, in terms of information, we didn’t want to suddenly go from what we had traditionally provided them with, to an avalanche of detail.

You need to have a very clear communication process for clients around what they are likely to expect. That probably means not providing too much information, too quickly, in terms of what’s happening in the underlying portfolios. You don’t want to be telling clients the reasons for every single trade that’s occurred. That’s definitely overkill.

We have started our client communications strategy as half yearly and based on feedback, we will move to quarterly. So, we’ve started the communication process with less is more.