'Platforms' to be fought out in front office

Some extensive discussion and articles over here in the UK about that the platform battle will be fought out in the front office. Sorry, werent platforms about holding investments for investors...doesnt seem like that anymore...

I think what we are seeing is the difference in the concept of a 'platform' to hold investments, trade, execute, settle etc, and the 'platform proposition'. It appears that there is going to become a distinct difference, and with such, a difference in the economics and dynamics associated with each also.

It is likely that the business of 'platforms' are high volume scale game operations of which there are probably going to be handful of viable offers in each geography. But the business of 'platform propositions' is likely to be very different. With the ability to outsource back office functions to some of the scale players, yes it sounds like differentiation is very much going to be in the front office. But let's examine this more closely...

Is it really going to be the case that each 'platform proposition' will develop all the componentry to provide a complete front office ? Isn't that going to be expensive ? Isn't that going to take time ? Hang on - isn't that the business of technology vendors ?

If we look at this in a traditional sense, we could see that technology vendors and 'platform propositions' are perhaps going to converge. However, I think if we look at this more closely in a more Web 3.0 context, perhaps we can see some distinct seperations.

In this Web 3.0 context, 'platform propositions' are the businesses that put together front office componentry, fill it with data, integrate it with their back office providers, and make it look and feel how they want to to suit their target market. But, in order to do this quicker and keep it up to date, they can (and probably must, in order to be economic and keep up to date with innovations) use outsource third party front office 'componentry' from proposition enabling technoogy firms (such as Financial Simplicity). With such an approach, a 'platform proposition' can put together a highly functional, interactive and contempory proposition with model portfolios, managed accounts, portfolio tools etc together very very quickly. I think we are talking weeks -- not months or years.

Which then begs the question, why wouldn't every wealth management firm with any size then create its own 'platform proposition' ? Perhaps it will, which then poses the question what is the market for independent 'platform propositions' ? Are they just going to service the wealth managers and IFAs not big enough to create their own 'platform proposition'? And at what cost?

SelfWealth, a brand new solution to an age old problem.

A great example of the new thinking required to run a sustainable, competitive wealth management business in our enduring environment of change and uncertainty.

For the first time in Australia, investors can now access an online tool, which compares their portfolio’s performance against those of peers, professionals and the market for one low flat monthly subscription.

Read full article: http://www.financialstandard.com.au/news/view/23482918

Next-gen platforms cater for wealth management renaissance

Financial Simplicity offers views on the implications for investors of rapid technology change.

http://www.financialstandard.com.au/news/view/23437492

Whither the US election... And Europe... And China?

With the US election fast approaching on November 6, election fever has gripped the US. However, while the outcome is doubtless very important to the US electorate, global markets remain as focussed, if not more so, on the continuing challenges in Europe, not to mention the slowing economy in China.

As Australian equities fall driving by continued concern over China’s economic slowdown (and its territory dispute with Japan is not helping), global banks are trying to force reflation and are engaged in lowering interest rates. The International Monetary Fund has now cut its global GDP forecast to 3.3% for 2012 and 3.6% for 2013.

How will this affect investor behaviour? Mainstream investors are more cautious than ever. Despite common challenges, every investor thinks his or her situation is just a little bit different to that of the next person. While continued market uncertainty makes it more important than ever to have complete transparency and immediate control over investment portfolio holdings, it is just as important to reinforce an investor's belief that he or she is indeed unique. Today, more so than ever, that concept of uniqueness is what will attract and retain long-term wealth management clients in a world beset by short-termism.

Attached below is a White Paper written by Financial Simplicity on how mass customisation can serve the needs of the Unique Investor in any market.

http://www.financialsimplicity.com.au/images/whitepapers/mass_customisation_and_the_unique_investor.pdf

Yes, the rich really are different…

Really interesting article in Canada’s Globe and Mail newspaper considering attitudes that differentiate the highly affluent from those who are not.

But the lessons and thought patterns presented in this article are not just the domain of the rich right now. More and more wealth clients – high net worth and mass affluent alike – exhibit rich behaviour (specifically, they are “more inclined to assume they are in control” and tend to “individualistic behaviour”). More to the point, they expect their wealth managers to have a complementary mindset and, critically for wealth management operations, this implies a means of facilitating transparent, immediate investment control.

http://www.theglobeandmail.com/life/yes-the-rich-really-are-different-from-the-rest-of-us/article4557430/

Custom-tailoring begins at the dinner table.

We’ve all grown used to being able to get any kind of coffee we want in Starbucks, so much choice that I’ve literally seen people freeze up when it comes to ordering. Yesterday, however, I realized that customer tailoring had even permeated the product-dominant world of McDonalds. All three people ahead of me special ordered – in one case even asking for three choices of toppings (in separate containers) for a basic ice cream sundae. Staff were happy to comply. They didn’t even raise an eyebrow. Special requests are expected, even in a business which depends on adhering to mass production and limited choice.

If customers expect to customise their food choices in a fast-food restaurant (and not pay extra), how much more will they expect when it comes to managing their money? The culture that is driving the demand for custom-tailored, highly transparent and lower-cost portfolio management begins with the most basic of human requirements.

The rise of consumer dominance is no longer a trend. The consumer - whether drawn from retail, mass affluent or high net worth segments - is dominant. Period.

An interesting recent perspective, emphasising current critical characteristics of successful wealth management firms, is included in the brief article attached.

http://luxuryinstitute.com/blog/?tag=rockefeller-wealth-management

Trends in the New World

Whenever I see a list of key trends in wealth management (and there are many trends, as well as many lists…), the same core imperatives stand out: increased transparency, increased consumer control, uncertain markets, greater value for money…

However, it's not the trend itself that's important so much as what you do with it that counts. Collaborative infrastructure allows the critical business drivers underlying these trends to be deployed in a way that's most appropriate for the clients of a wealth management practice.

If you're looking for effective ways to capitalise on trends (and you should be) make sure you pose a critical question: does the proposed solution support my business or control it? Truly collaborative infrastructure allows your business to evolve with the changing needs of your clients.

The new world demands that we are not paramount or superior to our customers. It’s all about them: Truly sustainable business management practices are those that allow the customer to collaborate in genuine partnership. That is the trend that integrates the rest.

The shifting nature of customer value in Portfolio Management

From my perch in the UK, I continue to observe an increase in the pace of change in the wealth management industry. We all know that the contemplation period for change is over - the future is no longer the future.

Speaking to clients in the past few days, it is clear that running a successful portfolio management is now about much more than designing and implementing individual portfolios.

A new era of customer proposition has emerged: one that is as much about transparency as it is about portfolio composition. The implications of this are enormous: genuine transparency suggests business processes that allow clients (in addition to wealth managers) to work intensively with their portfolios and in genuine collaboration with their wealth advisors. This has resulted in a new paradigm for customer value in wealth management today - value is received as a living entity as opposed to be sold like a commodity.

Clients as partners, expect to receive value in a multi-faceted, dynamic way as opposed to a linear deliverable. To achieve this in a sustainable manner, wealth managers must not only be responsible, they must be responsive. Responsiveness is a full-time, intensive proposition. This is not just the way of the future. The future is already in play.

Shoe Horning

There has been much discussion and concern by the FSA in the UK about caution in the appropriateness of developing centralised investment propositions (CIPs) and 'shoe horning' investors into such.

Whilst at face value this seems to be a reasonable concern to protect investors being put into CIP schemes largely set to meet the approximate needs of a customer segment, or investors with a category of risk profile, rather than the investor themselves, a number of questions come to mind:

Q1) how is this different from placing investor monies into specific investment products that are managed to a set mandate as opposed to an investor's specific situation (see earlier post on this BLOG about need for individual portfolios) ?

Q2) what if the CIP was flexible enough to accomodate the individual circumstances, needs and plans of the investor, resulting instead in a very personalised, but centralised investment process ?

In relation to Q2, should this be available and viable? (This is the core of the Financial Simplicity capabilities). Then wouldn't it be very much 'right' for the investor? It would also be a positive to encourage participation in the CIP and 'shoe horn' investors into it.

Advisors to increase passive exposure, Platforum study finds | News | Fundweb

http://www.fundweb.co.uk/uk/advisers-to-increase-passive-exposure-platforum-study-finds/1052155.article

How much threat is active management under?

Social media: the wild west of financial advice

Interesting article about some of the consumer / social media trends under way.

As I learned at the Social Media Summit in Sydney in 2011 - Assume full transparency!

http://www.professionalplanner.com.au/technology-2/social-media-where-the-eyeballs-are-going-for-financial-advice/

Wealth managers to face closer scrutiny as FSA unearths ‘widespread' failings

Article From Citywire....Emma Dunkley. Looks like systemisation and suitability are going to leave little room for error.

http://www.citywire.co.uk/wealth-manager/wealth-managers-to-face-closer-scrutiny-as-fsa-unearths-widespread-failings/a614420?re=20392&ea=314126&utm_source=BulkEmail_WM_Weekly&utm_medium=BulkEmail_WM_Weekly&utm_campaign=BulkEmail_WM_Weekly


The Financial Services Authority (FSA) is contacting firms offering wealth management services after identifying ‘significant widespread failings’ around record keeping and suitability and has said the sector may face tougher supervision as a result.

The watchdog wrote to all chief executive officers of wealth management firms in July, highlighting research that revealed major failings based on a sample of firms.

However, the FSA is concerned these failings stretch beyond this sample and are prevalent among other wealth managers.

The FSA said: ‘We have now commenced a new phase of thematic work and will, again, be making judgements on the suitability of client outcomes but also complementing this approach with a direct assessment of firms’ systems and controls.

‘We will be acutely interested in whether firms have heeded the warnings and concerns contained within our previous communications.  We will provide further updates on this work in 2013.’

The watchdog said it continues to work with firms from the first batch it assessed, in order to mitigate the risks and concerns that have already been identified.  In some cases these led to enforcement referrals, skilled person’s reports and remediation programmes.

The FSA said it will plans to interview key individuals from all these firms so it can understand the approach they have taken to remediate the problems revealed in their client portfolios and whether they have been ‘rigorous’ In dealing with previous issued that may have caused consumers to suffer.

Subsequent to these interviews, the FSA will consider whether to take further regulatory action, it said.

In the initial ‘Dear CEO’ letter the FSA said that its findings aired concerns there is an ‘unacceptable risk’of clients of wealth management firms experiencing unfavourable outcomes.

It said: ‘The failings may point to deficiencies in the management and control architecture of firms, so wealth management businesses can expect to see continuing and increasing supervisory focus.’

‘DIY’ model portfolios on the increase - FTAdviser.com

This is a really topcial article in much of my work at the moment and highlights the further industry supply chain 'pirating' going on: Players in the supply chain (in this case, advisors) are doing more and more to maintain relevance and margin in their businesses.

Are we entering an era in which there is going to be a desperate competition for securing the relationship with the client?  Will  platforms / advisers / DFMs / asset managers all compete to offer the same services?

My bet is that we are on the cusp of profound industry restructuring and, 'yes', there will be competition for the client relationship.  But, it will be just that the titles that change and perhaps a redefinition of retailers vs wholesalers.

http://www.ftadviser.com/2012/07/30/investments/discretionary-management/diy-model-portfolios-on-the-increase-sEln4mWA1K6h0Hp7AiVLdM/article.html

‘DIY’ model portfolios on the increase

Advisers opting to use ‘DIY’ discretionary management rather than handing business to discretionary and fund of funds managers.

By Bradley Gerrard and Jenna Voigt | Published Jul 30, 2012 | 0 comments

             Advisers are increasingly doing away with the need to outsource their investment management activities to a fund of funds or discretionary manager, by launching their own ‘DIY’ model portfolios.
The latest data shows advisers are flocking to opening DIY portfolios as a way of grouping clients into easily managed, fee-based structures. This enables them to continue to run investments even as the RDR comes into force next year and bans them from receiving commission payments.
Platform giant Fidelity FundsNetwork said more than 280 adviser firms have started using the firm’s new adviser-managed model portfolio service since it launched in October.
Model portfolios are effectively lists that dictate ideal investment portfolios for groups of clients with particular requirements based on their appetite for risk. Many platforms now enable automatic rebalancing of clients’ assets to reflect the changing model portfolios.
Paul Richards, head of sales at FundsNetwork, said there had been a “steady increase in demand” for the DIY portfolio service, adding that many adviser firms were now using it as a “core part of their investment proposition”.
Kim Barrett, senior partner at Barretts Financial Solutions, is running DIY portfolios hosted on the Transact platform.
He said advisers who are outsourcing investments to third parties could risk losing grip of their clients.
“If you are outsourcing then the client will eventually ask themselves why they need you,” Mr Barrett said. “It is such an obvious question but one which will smack advisers around the head if they are not careful.”
Stephen Piper, chief executive of Surrey-based Homecroft Wealth, has also opted for DIY portfolios - he said they gave his clients “more value” than they could get with a discretionary or fund of funds manager.

More

 

He added that many advisers were naturally concerned that they could fall foul of the FSA’s enhanced RDR requirements if they continue to try to advise on investments in any way - but these fears are overplayed.
Nick Bamford, chartered financial planner at Informed Choice, said DIY model portfolios enable advisers to retain value in their businesses - they can “give confidence, educate and reassure” clients about the investment process.
Mike Morrow, sales and marketing director at Ascentric, said half of the month-on-month flows go to model portfolios, with half of that going to adviser-contructed models, but he had not seen a recent significant surge.
“But models generally are continuing to grow as the choice of investment proposition as people look to tidy up their investment proposition before RDR,” he said.

A new world coming...

 

 

Our COO Enda came across the chart below based on the beliefs of Nikolai Kondratiev, a Russian economist (long time dead). Basic assumption is that we are coming to the end of the Information Technology innovation wave and entering a new as yet undertermined wave. The diagram below speculates on drivers, one of which is ‘whole of system design’, where technology seeds into the background and becomes a functioning infrastructure....

 

Strangely enough this is part of the blueprint for Financial Simplicity....

 

 

 

 

 

 

 

What is proposition enablement and why do we need it ?

Quite a few people are asking me about proposition enablement. What is it and why do we need it ?

 

Well the answer really lies in the answer to the questions: 'what do you do and why should you be paid for it ?', and the fact that many wealth management industries around the world are going to undergoe a massive change of consumer and participant behaviour brought on by pricing and fee transparency, not to mention the fact that millions of consumers will now start comparting fees and charges alongside the value they are receiving. Which begs the question, 'what is the value that I am receiving ?' and this comes back to propositions.

 

The point being that moving forward the wealth management industry is going to have to be a lot sharper about articulating what it is doing for investors, not in generic terms, beut specifically what are the decisions and actions that are being taken, what is the consumer benchmark for valuing this type of activity, and how will consumers compare and contrast providers of such. I suspect that it is going to get quite competitive out there as the consumer disects the overall propositions from wealth managers and wealth management web sites and start to string their own permutations of such to get the overall experience that they are seeking. The modern consumers pay for what they value, and do the rest themselves.

 

Now we live in very uncertain times when it comes to consumer experiences. Almost daily there are new propositions and related experiences coming out, and in wealth management this is no different. I alone am working with dozens of firms who are reinventing themselves and their proposition for 2013 recognising that consumer behaviour will be different. They are in essence placing informed bets as to what their customers will pay for. Some will win and grow, some may be tested and rework to adjust.

 

So what has this to do with 'proposition enablement'. Well most of these propositions are the offering of portfolio related products or services, in various forms, styles, philosophies etc, and it makes no sense that each proposition to develop out a full range of systems to support such. In the same way that an operating system on a computer provides a set of standardised components to get access to the computers resources (ie disk space, memory, screen, keyboard etc) in order to save appication developers considerable time, those who are putting 'propositions' together will want the same form of prepackaged componentary to help them put their proposition together. This is what we call 'proposition enablement'.  Financial Simplicity is essentially providing a portfolio based 'operating system' for rapidly enabling the development of portfolio propositions for investors.

 

 

 

 

 

Merton: the individual plan man

Check this article out at:

http://www.iandtnews.com.au/people/merton-the-individual-plan-man

Merton is clearly getting up to speed with Financial Simplicity.

A new era of Coaching

Had great discussion with our CTO today who attended the recent Gartner IT and Architecture Conference in Sydney this week. One of the key points was the changing role of 'IT Departments' in a world where staff bring their own IT (in for the form of tablets and phones etc to work) to work. The view was that IT Departments in organisations are moving from a 'Command and Control' position dictating policies and tightly locking down IT infrastructure to one of becoming 'coaches' on how customer facing people use technology to achieve their commercial objectives.

We are already seeing this where wealth managers inside larger organisations are just totally frustrated with the slow pace of change of in house vendor selection and implementation (which was quick compared to in house builds...) and are using or seeking to use more sophisticated capabilities (such as Financial Simplicity) on the web. They are not doing this for fun, they are doing this so they can compete better for investor customers, deal with them in a better way and at lower risk to the firm, and remain relevant and profitable.

At Financial Simplicity, we are taking this to a whole new level where internally we regard our team as a team of coaches who all add value to areas of our clients' businesses, essentially coaching them, and that includes coaching IT Departments to help coach their stakeholders also.

Some questions for contemplation:

- who are you coaching ?
- who should you be coaching ?
- who is coaching the people you should be coaching ?
- what infrastructure do you need in place to leverage your coaching skills ?

SELF-SERVICE CONSUMERS TO DRIVE IT SPEND

Reading the latest on-line edition of I&T News, I was struck yet again by the growing strength of the consumer-driven evolution reshaping the financial services industry each hour.  

In just four years' time across the Asia Pacific region, financial services businesses concentrating on the high net worth sector are anticipated to spend $150 million on technology.  The article, SELF-SERVICE CONSUMERS TO DRIVE IT SPEND, and its supporting research, are well worth reading and reflection.  

The challenge of change is well and truly upon us.   Those who will thrive will be working with a truly collaborative infrastucture - one that listens to, and then enables, the clients' changing views. 

http://www.iandtnews.com.au/news/self-service-consumers-to-drive-it-spend

It's not about you, it's about the value.

Good article from Tony Vidler at the link below. As the industry moves from price makers to price takers, it's less about the industry and more about what the consumer thinks of its value..

http://tonyvidler.blogspot.co.uk/2012/07/its-not-about-youits-about-value.html?spref=tw

Is “do it with me” just another catch phrase? Look closer…

'Do It With Me'...Yet another boring catch phrase. Yawn.  They just keep coming, don’t they?  Boring catch phrases designed as catch alls for trends that aren’t really new.  Or are they?

The latest I talk about a lot is  “Do it with me”. Self evident, right?  ‘Do it with me’, ‘do it for me’, ‘do it with anyone but me’, what does it all matter? 

Quite a lot actually.

 Why do we have to talk about this at all?  Because we have largely built an industry model built around a mentality of limiting people’s ability to exercise their choice.  We give them lots of choices but we LIMIT their ability to exercise choice unless it is in a ring fenced proposition or even limited choice of providers under a regulation.  Many are guilty of wanting to ‘do it for them’, shoehorn them into a one-size-fits all and not think about them for six months.

 Those days are over.  Consumers now demand, and receive, bespoke attention across a range of industries, not least of which is financial services.  They don’t want to sit powerless on the sidelines. They want to participate in the decisions being made about their lives.

 Should as an industry we don’t engage with the consumer on a meaningful level, they may just decide to ‘do it themselves’. In Australia where over $500Bn of superannuation assets are no outside public offer schemes (and growing at a rate of knots…) there is a clear sign of this.

 And whilst only 14% of these monies are advised, 42% of new monies are advised under this model. Has the Australian market realized that ‘Do It With Me’ is the new retail offer already ?

Rethinking Active Management

Great articles from Tria at:

http://www.triapartners.com/triapartners-blogs.php?article=content/Blog-Rethinking%20active%20equities%20businesses&type=NDM

http://www.triapartners.com/triapartners-blogs.php?article=content/Blog-Active%20equities:%20how%27s%20your%20marketing%20alpha?&type=NDQ=

About a number of questions concerning the future of active management in investment funds, and how products and marketing of such need to converge.

Ulitmately, I see this as being a real challenge to the concept of the unit trust as a single vehicle for investor portfolios: Not only due to structural imperfections and costs associated with their operations, but also because the drivers for them as sustainable business models are starting to come under considerable pressure.

Sustainability in Wealth Management

Interesting article about the need to find a more sustainable way of delivering wealth management value.

http://www.professionalplanner.com.au/private-banking/private-wealth-model-is-challenged/

Clearly change is coming...

The importance of systemised rebalancing

Article in IFAOnline today here about how systemised rebalancing may not be treated as requiring discretionary authorities by advisers.  This, I think, provides some insight into regulatory thinking.  It  also raises quite a few questions, some of these being:

Q) Who defines the rules for sysemised rebalancing? And, what is acceptable?

Q) What happens if the client has made some specific instructions (or combinations of) that the systemised process cannot accomodate?

Q) Is there a set periodicity that can be mandated for rebalancing portfolios? What happens if something important occurs in the middle of that period?

Q)  Is a systemised process the key aspect here? Or, is the key aspect how the systemised process is used for clients?

Whilst systemisation is clearly a step forward in removing arbitary decision-making (and perhaps bias), the most important aspect in this discussion is about what is most suitable for the client in the rebalancing process. In other words, there is not a 'one size fits all' here.

I imagine the firms that accomodate client-centric and client-directed rebalancing will pass all tests (regulatory and client satisfaction)!

Centralised or Decentralised Investment Propositions

Much talk over here at the moment in the UK about centralised investment propositions. In short, this appears to be about operating a centralised process of investment management for a broad range of clients: these are most often segmented in a sensible manner allowing for risk tolerance and investment timeframe.

However, running contrary to this view, there is much talk also about the need to have client-specific investment propositions that are tailored to each client.  Indeed, there is an emerging school of thought that it may not be good practice to just move clients into a centralised investment proposition.

Mmmm. I sense an issue here.

Perhaps there is an answer in between that addresses both views:

• Centralise the common aspects of a centralised investment proposition such as investment research or model portfolios, centralise the technology servers to help advisers make decisions, centralise the data feeds to provide portfolio context; and
• De-centralise the use of the technology, and the client-specific directives into the implementation process so that whomever is dealing with the end investing client can ensure that the common philosophy and process are implemented according to the client's situation

Hey presto !

The devil is in the detail here, but with the right technologies and processes, why can't the industry have the best of what initially may appear to be conflicting directives?

The Importance of Emotion

I am reading this great book 'Firms of Endearment' (which you can buy on Amazon). I strongly suggest anyone who is supporting a consumer business should read this book. Whilst I am only a little way through so far, one of the points the book makes is about the importance of arousing emotions in dealing with consumers.

 'A brand or company that fails to arouse a consumer's emotion in positive ways will not have consumer's loyalty. And the same holds true for employees'....

So, what has this to do with retail investing and the wealth management industry? Quite a lot I think.

Firstly, that interaction with consumers and retaining loyalty (in order to retain and grow revenue streams) means more providing content in the context of each consumer to arouse emotions. Those propositions that are too blunt and just about the product, instead of about the client, are likely to suffer. To really be about the client, it means it has to be about their investment portfolio, their situation, and their performance.

Secondly, unless a firm is passionate about what it does in the context of the consumer, it may struggle to retain talent also. Firms moving from an absolute culture to a client culture are more likely to attract and retain the best, motivated people.

Roles in The Retail Investments Moving Forward

So change is happening....We are hearing more from client facing groups about how they are going to change the industry dynamic, become investment 'manufacturers', pay platforms rather then receive monies from them, and change a lot of the industry from 'price makers' to 'price takers'. What is this going to mean in terms of the roles (and titles) of industry professionals, their firms, and where is the big money (or just survivability) going to be ?

Whilst I suspect there will be variants, in this new world it seems that the key roles may be:

• Client Advisers - this is all about providing 'context' for the client to help them make decisions within. Whilst the people that cant afford to see professionals to provide such may have to go on-line (and there are some great new sites to help them), the ones who can afford such will be paying client advisers for context in conversation. The more complex a client's situation, the more the challenge to find the right 'context', which will most likely include attitude to risk and loss (Thanks Paul !) . Should the client context fit within an advisory firm's scope, an output from the process of determining context is setting and choosing investment strategy with any accompanying client specific instructions. As value is what is received by the client, not what is given, it is likely that those advisers with the skill and ability to provide real context to clients will be in a sustainable businesses.
• Asset Allocation and Selection Experts - whether this be working out asset allocations that suit clients attitude to risk and loss, or the selection of individual investments (whether funds, ETFs or stocks), these people are going to be the ones responsible for constructing a variety of model portfolios with 'target' or 'theoretical' allocations to asset classes or assets.  These are the model portfolios that the advisers choose for their clients. The more sophisticated firms will seek to extend to separating asset class categorisation from specific investment selection as they realise that clients current assets don't need to be replaced to support a desired asset allocation. People in these roles may use a variety of techniques to determine their selections, may end up being largely quant driven, and may adjust their model portfolios on differing time frames depending on what the purpose of the model portfolio is. Many suspect that these roles will be either salaried in house employees to advisory firms, or perhaps specialist groups who provide such on a contracted service basis.
• Implementers - these roles are the people in a model portfolio based world that do the manufacturing within client portfolios. Constantly monitoring the changes in drivers of client portfolios (ie market prices, model portfolio constructions, or client rules), this role is responsible for ensuring that (and will be measured by how well) client portfolios track their nominated mandates (model portfolios combined with client specific rules, preferences and constraints) as determined by the clients' advisers. Good implementers will react quickly to changing market conditions and model portfolios to outperform their competition to leverage the capital markets. Implementers get efficiency of scale by working their client portfolios as an overall book, treating clients fairly and getting economy of scale. Service levels will be the key differentiator followed by price and I suspect that there will be a few high volume providers or enablers (like Financial Simplicity) that will fill or support this space
• Dealers - these will be the people who attain the results from the market that the implementers deem appropriate for the client portfolios. Dealers are close to the markets and good ones reliably perform by getting results for their clients, whether just in terms of service levels or price efficiency compared to others.
• Platforms (or Administrator) - these will be the businesses that operate 'asset containers' on an outsourced basis for investors and advisory firms, and will be paid service fees as opposed to out of client's assets. It is shaping up that this area of the industry will be differentiated by ease of access to information, technology integration, range of investments available and service levels first, and then price second as pricing levels will be driven down by high scale operations.

The Difference Between Discretionary Investment Management and Model Portfolios

I have been involved in much discussion in the last few weeks about the difference between Discretionary Investment Management (DIM), often a service to the wealthy, and the use of model portfolios which may be 'managed' by investment platforms.

At first glance there is some similarities from an operational perspective, especially if a DIM firm uses model portfolios as a starting point for packaging investment research into a form of scalable offer to many clients. Similarities can include the use of model portfolios and an authority for someone to occasionally rebalance the clients portfolio towards the model portfolio. However from a service proposition perspective things can be quite different, as I have tried to bring out in the diargram below:

 From a servicing proposition, a DIM is usually pretty clearly responsible for all aspects of the service to a client. the DIM firm packages up research, investment selection, portfolio management and administration often into a single accountable offer.

The provision of a vanilla model portfolio service clouds the proposition a little in the sense that the model portfolio may be sourced from a third party, and the implementation of the model portfolio may also be performed by a third party (usually a platform) also. However with adequate discolsure and explaination, these 'straightjacket' model portfolio offers are getting increased traction, albeit with some concern from regulators and commentators, who are suggesting that the 'implementation' of model portfolio decisions may need to reflect the clients' specific situation. These concerns seems pretty reasonable as the implementation process is actually often buying and selling investments for clients and whilst such decisions may be accurate in the context of a model portfolio, they may may be not in the interests of the client. MMmmmm. So how is this possible conflict to be resolved ?

The answer must lie in allowing adviser or clients to provide some instructions on how to implement model portfolios for their specific circumstance. At Financial Simplicity we call these clients rules, preferences and constraints, and believe that the ability for advisers to provide such instructions help implementers (who have no relationship with the client usually) deliver improved service to investors, and hence support their advisers, aswell as address concerns about investors receiving a '1 size fits all' experience against their wishes.

Clearly this does however create a headache for implementers not equipped to deal with such instructions from advisers and their clients, and the problem magnifies and magnifies the larger the client base becomes. This is where specialist technologies come in..

Clients pushed into model portfolios

Interesting article on the FT web site about how retail investors are being pushed into unsuitable “one-size-fits-all” investments as portfolio managers change their offerings ahead of new regulations, the UK’s financial watchdog has warned.

The article is at:

http://www.ft.com/cms/s/0/bc9622c4-7e3c-11e1-b009-00144feab49a.html#axzz1rtUjoCFX

Whilst the article doesnt give the answers, it does lead to many questions about possible floors in the product based regulatory regime to date. Some things come to mind:

• what is the 'risk' profile associated with the offer to the clients, is it that of the 'risk' profile of the 'product' or the overall 'portfolio' (in this case model portfolio). As most people know, the 'risk' of a diversified portfolio of risky 'products' is diminished when offered as a portfolio ...
• what is the basis for assessing 'risk' ? Is it based on the past volatility of investment valuations ?, is it based on the relative level of valuation of such assets (which more and more portfolio managers seem to be working on), is it based on the 'risk' that the client feel comfortable or not, or perhaps even meet their goals ?
• is it appropriate for clients to be 'shoved' into what we are now calling 'straightjacket' model portfolios (one size fits all) ? or is a level of client specific overlay a basic fundamental part of assigning a model portfolio to a client, and the ongoing portfolio management to such ?

My belief is that we are in transitionary period in the wealth management industry where we are moving from a mentality about using modern portfolio theory to justify prescribed asset allocations according to industry practice, and often being an excuse to sell products to fit, to one where wealth advisers are going to have to be more pragmatic about how they manage their client portfolios on terms that the client understands, such as 'we will buy this now as we think it is cheap' etc.

The question that follows then is 'do model portfolios achieve this ?', or more to the point 'does the technology and operational processes that you have in place support this type of client engagement ?'. At Financial Simplicity we have worked with some great individuals and firms to possibly have the answers.

Flaws in advice system revealed by ASIC report

Does the below article suggests change is coming ?

http://www.financialstandard.com.au/news/view/12787507/

Evolution in Wealth Management

I was asked the other day why mass tailored portfoio management is going to be important, and so put together a slide that tries to depict such.

In short, we are experiencing two key trends that taking increasing priority in the business world today:

1) consumerism is shifting to customised offers, to be in 'context' of the consumer. This trend is highighted in the world of non physical delivery (ie music, financial services etc)

2) the need for scale for growth, or perhaps even survival in times of reducing margins. With this in mind, business today is seeking to eek out inefficiency and come up with 'unconstrained' or 'very elastic' operational models (There are probrally better phrases - comments invited).

So if we look at wealth management, where it started, where it has been, and given the above, where it is going, we end up with something like on the attached diagram.

THe questions we have to answer as an industry:

a) what happens to a lot of the current offers when 'client centric' becomes a standard, not just a premium service (just think what happened when itunes was introduced) ?
b) what happens when industry participants industrialise the process to the point where they can offer client centric offers at a very attractive price point ?

Does this make the lower left four boxes look redundant ? What are those participants going to have to do to remain relevant ?

Adapt or Face Extinction

Fascinating article on Darwinism and applicability to business from Ian Verrender from the Sydney Morning Herald at http://www.smh.com.au/business/adapt-or-face-extinction-20120220-1tjqa.html

Key quotes that I like:

• 'Successful businesses adapt to change and evolve. Those that don't become extinct.'
• 'Admittedly, the online threat to traditional retailers has hit with a bang. Consumer attitudes, and with them behaviour, shifted suddenly in the wake of the near recession in 2008 when debt repayment took precedence over consumption. Suddenly, everyone was looking for a bargain.'
• 'Regardless of technology, human beings are social animals. They crave interaction and demand personal service.
• 'There is no escaping, however, that the way we shop, and the way goods and services will be delivered is changing rapidly and those who fail to adapt will not survive.'

Clearly the article is focussed on the trends that the world is seeing in on-line 'retail' shopping, but many of the same trends are being seen in wealth management also. In translation:

• Much of the old product distribution based business model is facing threat from either regulatory changes or consumer backlash - adapt to a client centric model rather than product centric model or face the risk of extinction
• Consumers are more connected and comparing their wealth management services that they are receiveing. This is innevitably going to increase margin pressure, the days of the big salaries are going...
• Humans are social, and when it comes to their monies, they want communication and consideration of the THEIR situation in such. Market commentaries are a plenty around the Internet, what they want is communication about THEM, personalised and relevant
• There is no escaping that in a world of social media and the Internet, that the formula in the way that consumers seek out, and choose both investment strategies and solutions will, and is changing. The key trend here, like with retail shopping, is the unbundling of the process and doing at the pace that the consumer wants to. In Australia this trend is vastly accelerated as the SMSF structure even enables the consumer to have their own 'tax wrapper' and therefore free to invest (within reason) into whatever they seek, how they want, when they want.

No-one can argue that the world is changing, but are we now facing an acceleration in the change where there is now increasing confidence (and reward) for doing things a new way ? Has tradition become uncool and perhaps costly for those who are not preapred to make change ?

Mass Portfolio Customisation and the Unique Investor

It has suprised me that an industry such as wealth management, which in reality is not actually physically delivering much in terms of a physical 'product', has taken so long to adapt to one of the most powerful marketing and consumer concepts of all time, that of mass customisation.

In the linked paper here, there is a discussion of the power of mass customisation, and how it can work in wealth management, that of delivering mass tailored portfolios for investors.

With consumer power on the continuing up, we are seeing this trend on the up.

Platforms in 2012

Great article on the Tria Partners website about trends for investment platforms in 2012

http://www.triapartners.com/triapartners-blogs.php?article=content/Blog-Platforms%20in%202012&type=MjQ=

Industry pressures acknowledged are:

As we all know, the retail platform business model is under pressure from:

• A large and growing self-directed investor segment which is using SMSFs as its preferred vehicle

• Rotation by planners away from managed funds to direct assets (including equities and term deposits)

• Improvements in technology which are allowing planners to rotate away from traditional platforms entirely

and I love the lines to get people thinking like:

'Today’s direct customer may want advice tomorrow. '

'For incumbents, “do-nothing” looks increasingly unattractive, '

and the summary

'2012 needs to be about getting back in the game - regaining lost customers and restoring damaged confidence. There are many strands to this, but delivering quality, low-cost products to key customer segments, through whichever channels they want to buy, and with or without advice, is an important part of that journey. '

With the trends to the offering of direct owned assets, the need for wealth managers to both develop disciplines and tools for managing client portfolios is on the rise. Feel free to call to talk to me about the area.