Portfolio Management : Advisory vs Discretionary, The Pros and Cons are Changing

In many of the groups that I visit around the world, we find that they have a portfolio proposition that is either advisory, discretionary, or perhaps have both. What I find interesting though is why their propositions are such and whether they are open minded to the alternatives.

In the advisory proposition camp, we often find that the key drivers on the positive side are that it supports a highly client engaging and interacting proposition and supports relationships, and in other ways is regarded as often with a lower business risk as each adjustment to the portfolio is done with the client’s approval. The downsides of this proposition for the adviser and possible also the client is that it requires for the adviser to establish contact with the client, for the client to approve the portfolio adjustments which may have challenges if the client is not in the same time zone as the adviser, may not be contactable, or just doesn’t want to think about any portfolio adjustments at that time.

In the discretionary camp, the clear benefits are that the adviser or portfolio manager can take advantage of short living market opportunities, perhaps can get leverage of the whole book size (or many portfolios at the same time),  and reduce or eliminate the workflows for client communications and confirmations when adjusting portfolios. Also this model is inherently more scalable as less ‘workflows’ to involve external people (ie clients) are required. The downside however is that in many countries the regulatory overheads and approvals to offer a discretionary service to investors is sometimes quite challenging in terms of license approvals, education and experience requirements and often firm capital adequacy requirements.

 

What I find interesting is that in some countries the discretionary service is regarded as the premium service for more valuable clients, and advisory for the broader client range, whereas in other countries it is the other way around. Clearly this is historical in it’s positioning.

 Now enter the world of new technologies over the last 10 or so years, like smartphones, interactive web sites and global internet connectivity. A combination of these essentially help overcome some of the challenges of the advisory portfolio proposition as it can be easier to communicate with clients and get their approvals. Compounding this with the ability to produce high quality personalized portfolio reviews with massive scale and efficiency though Financial Simplicity, and we have now sufficient enough ingredients and removal of the frictions of the advisory model to make it a lot more efficient, and more scalable also.

 Whilst clearly the advisory model will not suit the client that expressed strong preference or instruction that they just doesn’t want to be contacted (which may come with additional costs to support the regulatory increases to deliver such),  some of the business and operating barriers and considerations can be ironed out and / or be removed.

Picture this:

a)      Each adviser can use portfolio intelligence capabilities from Financial Simplicity to monitor all their client portfolios (could be thousands) for required portfolio adjustments. Within seconds they can identify which client portfolios need adjustment.

b)      Then for those client portfolios that warrant adjustments, the adviser can use Financial Simplicity’s personalized portfolio modelling / rebalancing in seconds again to produce personalized portfolio reviews for such clients. With the automation in Financial Simplicity to support this, they may do this for dozens of even hundreds of client portfolios within minutes

c)       Assuming the clients have phones or email. the adviser can then use their email / CRM / SMS or whatever ways of communication they desire to communicate with their clients electronically

d)      The clients can read the portfolio review documents and can then either speak to the adviser or use on-line methods to approve the portfolio adjustments for the adviser

e)      The adviser then implements the portfolio adjustments according to their workflows and methods which could involve methods to efficiently make trades for clients en-masse

In the same way that discretionary managers may only make smaller adjustments to portfolios in a day, should the above process be sufficiently efficient, then it may be that each client portfolio review will just be smaller adjustments, requiring less contemplation or time to consider by each client, improving overall end to end efficiency.

 When faced with the decision of advisory vs discretionary portfolio propositions (or both), the above operating model raises a number of questions:

i)                    What is the client engagement model  that each client prefers, to ensure to deliver a service to their requirements ?

ii)                   What the different economics of the different operating models ? Are now the costs of monitoring , reviewing / rebalancing portfolios and communicating with clients now down to a cost level that makes it more appealing than a discretionary offer (with associated regulatory overheads perhaps) ?

iii)                 What are the set up and establishment costs (ie licensing, capital adequacy, resourcing, compliance  etc) for the different proposition types ?

iv)                 Where are the technology trends likely to move in the future ?

v)                  What pricing levels,  premiums or discounts can the firm provide for each type of proposition compared to the other – which is cheaper or more expensive to operate ? what is the relative value in the eyes of the different client types ?

vi)                 Now do I segment my clients more around how they want to be engaged rather than how much monies they have for investing ?

 With technologies such as Financial Simplicity that can enable very efficient and massively scalable advisory or discretionary portfolio propositions, there clearly are opportunities for firms to think hard about, and be creative with, the type of propositions they want to offer, and accommodate broader ranges of clients. The profitability of each proposition I suspect will be quite influenced by how regulators regulate the different proposition types, overlayed with the increasing ease of use of networked technologies to bring the adviser and the client closer together.

 I also am guessing that moving forward, wealth management firms may find themselves in a position where the client may have apps and technologies in their hands that will define how their service providers will interact with them if they want their business. The ever changing technological, regulatory and social landscape that we operate in I doubt will keep evolving and changing.

 

Digital Termites and Wealth Management

In the late 1990s, I used to work for an innovative company called 'Open Market' which pioneered both ideas and technologies about the commercial use of the Internet, much of which has evolved and become commonplace today.

One of the themes that the President Shikar Gosch introduced was the idea of 'Digital Termites' and 'Termiting' digital media. What he meant by this is that with broad access to information and data by anyone if a supply chain, there was the ability for industry participants to extract new data, re-purpose it, combine with other data and create new value propositions. He called this process 'digital termiting' and the organisations that did it 'digital termites'.

What has this got to do with wealth management ? Quite a lot !

We are in an unprecedented period in the investments and wealth management industry of the grab for consumer relationships and margin compression, and with this it is largely recognized that there are 'too many snouts in the trough'. There has been to date in many cases  multiple 'layers' of value (bringing together someone's opinion, market access and / or intellectual property) that over time have been synergistic, but the packaging of such has lead to an 'supply chain' that has become expensive and inefficient.

This is where the termites come in.

Organisations that may have relied on third parties to package up their value in some way, and combine their value on the top or bottom of such are now more able to considering 'termiting' the value propositions together in a more efficient manner and cutting layers of costs out. Examples may include

• where advisers are packaging up asset allocation information and investment model portfolios to replace investment product providers
• where investment platforms introduce model portfolios of investments to displace 'fund of fund' managers and / or investment products
• where asset managers seek to go directly to consumers and offer personalized investment portfolios with consumer data
• there are many more....

They key questions for wealth management industry participants are:

• what risks exist to your business of being digitally 'termited' by others
• what digital 'termiting' opportunities are there for your business to cut the snouts out of the trough and increase your business standing
• would you be disadvantaged if others could digitally 'termite' you proposition out from around you ?
• what data do you have that is important to your business to ensure that it is not 'termited' out ?

In an era where conflicted remuneration structures are being disbanded, and digital information is more readily accessible than ever before, I'd suggest that this trend is not going away...

If it means introducing an investment proposition into your business, we would love to help you understand how to achieve this and perhaps 'termite' some value elsewhere into your business.

The Wonders of Model Portfolios

So many firms are bringing in these things called 'Model Portfolios' and for some, they look like a new list of approved investments for clients, often in different proportions for different risk appetites. So what is the big deal ?

Well the big deal is that to be used properly, 2 key things must happen:

1) authors / publishers of model portfolios need to maintain them as their views on markets and investments change. To not do so could imply that there is perhaps some lack of duty of care, and it is a pretty public place to be seen here
2) those advisers that use the model portfolios need to continually check that their client portfolios are kept within whatever parameters associated with the model portfolio in order to demonstrate

• that they are delivering to promise of a portfolio in line with the model portfolio
• that they are demonstrating a continuous and comprehensive oversight of the clients portfolios bearing in mind the model portfolio

Whilst practices of the past may have deemed this to be sufficiently done once a quarter or once a year, regulators around the world are expressing that the onus for advisers and the firms that they work for, is to do this in line with the way fees are being charged, and if the advisers is to position themselves as a fiduciary, that this is pretty well a continuous process.

Perhaps look at it should an adviser not achieve this continuously......what risk does the adviser or business open itself to from clients if portfolios deviate from model portfolios ? What are acceptable tolerances ? Are they defined ? Also, what does an adviser need to do to justify their fees to regulators that are looking at this a lot more closely.

At Financial Simplicity, we believe best practice is that advisers and firms are best served to work together to both be able to monitor portfolios to model portfolios at the same time. If the advisers notices breaches first, it is a client servicing opportunity, if the firm / licensee does, it is a business risk reduction action.

Call us to find out how..

Tinder Understands its Users Better than Most Robo Advisors

I just read this article here at http://www.financial-planning.com/blogs/idea-exchange/tinder-understands-it-users-better-than-most-robo-advisors-2696001-1.html

I guess really opens a can of worms in terms of people personalities (or multiple of), and what is really the best way to ascertain some key aspects of people's financial profiles, attitudes to risk etc.

I do agree however that the phraseology and understanding of short sentences is open somewhat to interpretation, and that a perhaps more interactive approach, based on actions and larger amounts of data, could lead to better understanding of people's financial profiles, and suspect that we will see considerable innovation in this space as current methods get tested.

It reminds me some discussions with some telcos where they point out that often that the data on mobile phones and the analysis of such helps in some ways to enable them to know the phone user better than their partners..

The Digital Revolution and whats coming in 2016

That time of year again, where in this part of the world (Sydney), most people are heading back to work after a solid break. I find that each year after such a break, the thinking in the industry advances considerably as people have had time to clear their heads and absorb what has being going on around them last year. This often leads to new energies and directions, and this year I am already experiencing no different.

 
You may have been also reading about what many in Davos have been calling the ‘4^th industrial revolution’ which others have called the ‘digital revolution’, and I suspect there are a number of other names also for it. My key observation is that this ‘revolution’ is about the highly connected society that we now live in, where the power of the highly connected consumer (through smart phones primarily today) is having amazing effects on industries, businesses, society and individuals. Wealth management is no different and many in the industry are realizing that there is perhaps some profound trends and changes that are upon us, and this is driving the new energies for 2016.

 

Whilst sheer power of communication between individuals and businesses has clearly been evident in the use of smart phones, what is now being realised that this doesn’t just mean we communicate like we did before must more efficiently, but there is now new ways to communicate that mean that some communications of old are now redundant, and other types of communication are becoming more relevant. In wealth management, this is stuff like not just understanding valuation of portfolios with associated research, but introducing consensus on investments and sectors, dynamics of the markets with new metrics, and even ‘social’ overlays associated with companies etc. This also applies to what regulators are expecting to be reported to them.

 

We are also however seeing that some of the conflicts and shortfalls of the prior industry model as it has developed becoming increasingly exposed and industry participants finding themselves under increased scrutiny both from their clients who are demanding more information, but also the regulators, who are having to respond to the increased amount of data and information appropriately, which is in many cases creating new regulations, codes of conduct or even laws. I suspect in 2016 that will see this accelerate and like in many industries or other parts of life, that the ‘social regulator’ may in many cases have more of an impact than the one that comes through the door.

 

Back to people coming back from their Christmas breaks….well we are already number of enquiries around ‘how do I deliver to my clients better ?’, ‘how can I stop using product based platforms ?’, ‘how can I put in a model that allows me to scale the business easier than hiring people ?’. Well a lot of this happened last year, so what is different this year ? This year the difference is firms are recognising that rather than looking at each of these issues individually with point solutions, there is clear recognition that to manage such different initiatives separately, often with different technologies, is both expensive, and often leads to increased overhead rather than improved overall business performance. I suspect that is why many are telling me that so many wealth management firms around the world last year were struggling to improve profits, or in many cases even make a profit. The new year realization for 2016 that people are coming to is that just ‘putting more lipstick on the pig’ is not a recipe for success and that a more integrated coordinated approach, requiring broad enterprise review and modeling is required.

In the UK we saw a number of mergers of wealth management firms that I suspect will get efficiencies of scale in delivering the model with less duplicated overhead, but the question I ask is whether that is just short term fixing but avoiding the real issue of that a new engagement model is required in the digital revolution.

 

I still think we are at the start of this ‘digital revolution’ and some rules of thumb that I think will emerge from such are:

-          Be very clear on your value proposition to your client

-          Be very clear that your clients understand the value (to them) of everything that is put in front of them

-          Expect regulators to start wanting to look at more ‘data’, and ask for more definition of what your business is doing to add value to such data

-          Take it for granted that you cannot hide from the social regulator, and ensure practices and conduct reflect such

-          Often your uniqueness is your value

-          If you are in a value chain, expect your suppliers and partners to ‘pirate’ the value chain, ie move around you

-          Expect new forms of digital communications to be requested by, and valued by, your clients

Thankfully at Financial Simplicity, we have been helping wealth and investment management firms with much of this for some time, preparing them to survive and thrive in the digital revolution. If you are wondering what the digital revolution may mean for you or your firm, drop me a line. Its more than a web page.

 

 

 

EY Report - The $500 Trillion Consumer Centic Prize

Just read the recent report from EY about the $500 Trillion Consumer Centric Retirement Prize at www.ey.com/pensionsreport2015. Great report with some really pertinent observations in there. Some I specifically noted (sorry rather long but it is a long report !):

·         There is broad recognition that the industry has a long way to go, which I suspect needs to happen in line with the changes to public policy, regulation and societal sustainability and the role of money. The question raised about who underwrites the wellbeing risk of people I suspect is one of the biggest issues of our time.

·         There is a major point raised around that in the shift in the attitude from ‘paternalistic’ to ‘client centric’ means different skill sets in both subject matter and management. At Financial Simplicity we have seen this for 10 years now, where firms making such a shift to a customer centric model need some very different ingredients. We notice that there are just different characteristics of the CEO’s right through the organsiation. It is difficult to pinpoint it, but some critical ingredients appear to include high degrees of knowledge and competency, a business owner mentality and passion (in more ways than just equity), and a higher appetite for ‘participation’ over ‘position’

·         the question of who pays for innovating and developing the new infrastructure required for a consumer centric industry and operating model is a really big one. My view is that this infrastructure will have quite a different form from the last ‘generation’ and will be far more ‘intertwined’ rather than ‘standalone’ product / organisations. I suspect that amongst this infrastructure will be some very key components that will almost be regulated to be used to support a consistent theme of consumer centric outcomes. I aspire that Financial Simplicity or the techniques we have developed around consumer centric investment management will be one of such

·         I think Figure 4 is great and believe (as practiced) that 'Simplicity' (or rationalising complexity into..) is very much a key tenant of the future in a consumer centric world

·         I really like the mention of the ‘all stakeholder’ code of conduct and believe that this will underpin a form of regulation. I suspect it also will closely align with the attributes of organisations that successfully transition from ‘paternalistic’ to ‘client centric’

·          the issue of consumers’ understanding the relevance and roles of all those involved with their ‘wellbeing’ will be critical to create, and sustain,  a new era of trust. One could argue that this extends beyond financial wellbeing also, but limiting it to such, I suspect every organisation will need to how it is positioned in the eyes of the consumers it ultimately deals with an what is it’s value proposition and cost base

·         The point about wellbeing being the driver, but how is it measured and monitored ? I think is quite interesting and also can extend well beyond financial issues. I suspect we will see an increased focus from the industry on broader issues than financial affordability and see it extend into education beyond consumerism and hype

·         The point about the need for clarity for alignment of interests is a key one, and always difficult to implement in a world where there are stakeholders that one could argue have different motivations than that of the consumer, such as shareholders in the companies’ that serve them. This is closely linked to the question about the funding of new era infrastructure as clearly those who invest in such will be seeking some form of return

·         There is a mention which I like about all stakeholders to increase understanding of behavioral finance to increase confidence. I suspect it moves beyond impacting consumer confidence also, but a necessity for behavioral finance understanding in order to improve organizational culture and ability to lead. Over the years I have become well aware of the conflicts of staff in companies who are doing one thing in terms of investing for their clients vs the way they would invest their own monies due to the difference in managing to 'mandate' vs personal outcomes.

·         In relation to the ‘digital’ advances, there is welcome highlighting of the need for the encouraging of participation for consumers and empowering to make decisions, ultimately implying involvement in the decisions and outcomes that effect them. At Financial Simplicity we have noticed that our client firms that practice this ultimately end up with much higher client satisfaction levels and I suspect are helping their clients with their ‘wellbeing’ beyond just managing monies.

·         There is a really pertinent point about what is the purpose of the financial ‘wellbeing’ of consumers which spins out plenty of thoughts as to what is the purpose of the pension / investments industry also. I suspect that governments are going to really have to think this through, especially globally now given the global flight of monies, and position financial and economic wellbeing in the context of sustainable and healthy societies.

·         In the governance section there is a reference to the need for ‘an integrated and adequately empowered fiduciary framework that covers the entire value chain and it’s key stakeholders to maximise alignment and support confidence’. This lies very closely to the point about consumers understanding all the roles of people involved with their financial wellbeing and the shift from paternalistic to client centric propositions and cultures of running such businesses. My view is that this will ultimately come down to a more formulaic value chain model with some very common components that define the fiduciary framework. Many suggest that Financial Simplicity could be one such component

·         I was amazed on Figure 19 as to how few rate themselves as being ‘easy to deal with’. I also liked the framework in Figure 18 that hits with some of the core issues at the heart about avoiding negative emotions and building on positive ones, a stark contrast to the paternalistic model. This is something that we have had at the core of Financial Simplicity for over 10 years as we are reminded by our clients that making investment (or other financial) decisions is quite statistical in it’s outcome, but very emotional at the point of decision.

·         The point about the importance of digital in making this transformation from paternalistic to customer centric I think cannot be underestimated, and was amazed (ie on the low side) at the chart about participants perspective on such. Customer engagement and customer experience is THE future for satisfying the new consumer and will iterate the advances that need to be made here, for which without I believe that firms will just be left behind.

·         There is a point about the cost of regulation being high and how this impacts the ability to innovate. This is undoubtedly a major factor deterring progress and in Australia we are seeing some really welcome initiatives being taken in an attempt to unlock this barrier, such as the ASIC Start Up Innovation Hub. My guess a lot of the issue here is that regulation has to be designed quite broadly for good reason, however the lions’ share of servicing consumer with wealth accumulation strategies can be quite simple to regulate if they stay ‘on piste’. I suspect over time we will see some ‘slim down’ regulation to support consumer centric initiatives come into the market easier as long as they ‘fit in the box’, and for those propositions that deviate considerably (such as highly leveraged complex products) will have more regulatory overhead to deal with. It will be interesting if such strategies and products then are attractive with such overheads compared to the more simpler ones

At Financial Simplicity, we have been both thinking and developing techniques and technologies for over 10 years to help firms with the shift from ‘paternalistic’ to ‘customer centric’, and this report from EY I think highlights much of the issues associated with achieving such. Ultimately I am of the view that this shift will not be achieved alone, firm by firm, but will take a coordinated approach across all stakeholder groups with tight consultation with consumers in a very ‘agile’ fashion. If you are interested, we will be happy to talk about it.

Managed Accounts and Practices vs Businesses

There are some increasingly clear lines being drawn in the rapidly growing world of managed accounts. One of them relates to whether wealth managers are practices or businesses. "What ?" you may ask, or "Why does it matter ?". Let me try and explain:

 

First of all distinction between a practice and a business. For this article, lets call a 'practice' as a group of people (perhaps in partnership), who invariably are in work of servicing their clients, perhaps joining together to help each other out and form a larger footprint than they would themselves. Practices often are named after their principals and may be 'partnerships' of some form.  Lets call a 'business' as something that is usually incorporated, usually creates a 'product' and is often about creating an operating model that can grow, scale, and possibly ultimately be sold as an operating entity irrespective of the owners of the business.

 

Some key differences here:

• Practices are often charcterised by their principals and often have 'succession' issues as often a lot of the value is lost when the principals leave (who would go to Smith and Partners if Mr Smith may no longer be there ?). Because of this, they often trade at values or multiples of profit / revenue that are lower than businesses.
   
   
• Businesses are often characterized by brand and their product, which can be passed on from owner to owner. Businesses are often less 'personal' but fulfil an important utility value to their customers. Because of such, they trade at larger values in terms of multiples of profit and revenue. They have broken often the link between owner and management.

 

What has this to do with Managed Accounts ? Well in some cases quite a lot, especially in terms of valuations of the firms that are providing or using such. The key point is that the firms that are using other firms managed account offers are more like 'practices' and those creating and operating their own managed account offers are more like 'businesses'. Clearly (and often) there are hybrids also, which in many cases have, or are considering, splitting such operations between portfolio manufacturing operations (ie a business) and dealing with clients (ie a practice).

 

We have noticed this with some of our clients recently who are reporting that as they transition from  being a 'practice' to having a 'business' with a managed account portfolio 'product' that can be promoted by both themselves and sometimes others, that they are being viewed with higher valuations.

 

So if you are involved with the creating or selling of managed account portfolio offers, perhaps ask yourself whether you are in a practice or a business, and ask yourself is what you are doing currently the best way to maximize the value of your skills and assets, and if appropriate how to turn your capabilities into a 'business' that may have considerably more value than just the servicing of clients.

 

At Financial Simplicity, we would like to think that we very much recognize the differences between 'practice' and 'business', and continue to help firms make the transition to create value for their owners.

 

In summary:

• Practice - often promoters of other providers' managed account offers, or service clients on a 1 to 1 basis
• Business - often operators of a managed account offer that can be promoted via client attraction and servicing channels, or other firms (often practices)

Just think how valuable a business would be if it could manufacture a managed account portfolio product that was tailored to each investing client ? That's practice level service with business level value, that's Financial Simplicity ! 

Thankyou to my friends Creel Price and Matt Church for some of the background around practices and businesses.

Robo what ?

It feels like the industry is in a 'Robo advice' frenzy at the moment. Fears of disruption are ever present, threats to the status quo, low cost investment offers, etc. Naturally many look at parts of the industry structure today and see it in a new light, but what actually is that 'new light' and what is the perspective and context around what is going on ?


I notion that the 'new light' is the trend hitting wealth management that has been impacting other industries for the last decade or more, that is of consumer empowerment. Consumers that are connected to the internet, have access to massive amounts of data, have access to powerful tools and technologies to filter such data....to do what ?


I guess fundamentally the blend of information and tools is equipping consumers to be able to compare and contrast investment offers and their 'suitability' for consumers like never before. One could argue that in many cases, the investment solutions are great for the consumer, with benefits such as lower costs, more active communication to clients, a confident sense of 'suitability' etc.


So is this the end of the wealth management industry ? Is 'Robo Advice' going to replace 'Advisers' ?


I suspect that the answer, like all periods of change and evolution, is 'Yes' and 'No'.


Yes, because with a higher level of consumer education, combined with access to some great investment sites on the Internet, a portion of that consumer base will see benefit in using the 'Robo Adviser' sites and negate the need to see an 'Adviser'.


But lets now compare this to Amazon.com and what happened at the turn of the century. Did some bookshops disappear ? Yes they did. Have other bookshops remained, others started and prospered ? Yes also. What happened is that in the first round of culling, many service orientated consumers voted with their 'feet' and either went to bookshops where there was either a value added service, or they just liked being there. Many consumers who just knew what they wanted and were prepared to wait a day or two went on line and felt that they got a better deal at Amazon. The bookshop market one could argue split into 2, value added boutique and mass volume on-line. Also, subsequently the boutiques worked out a way to use other services to get to the mass volume title lists also so they could compete on product range.


And this is what I suspect will happen with investments and wealth management, which introduces the 'No' answer. The 'No' is because a lot of what is being called 'Robo Advice' is not actually really 'advice' per se, but more just about filtering on a rules based engine to find an appropriate product. If this was all that 'advice' is and was, then I suspect that 'robo' would replace traditional advisers, and I suspect in a section of cases it will.


But back to the developments in the bookshop industry....Is it likely that the boutique advisers, who can demonstrate to their client base that they add more value than just selecting a product or asset allocation mix, remain sustainable ? Sure, if they can demonstrate the value. And like the boutique bookshops, they may actually end up using the more automated lower cost sites and engines to actually fulfil the product to the client (that's what they do when they go to the backroom as say it is on 'backorder'). The key point here is about 'value'. Access to investment products in a world of broad availability of everything is unlikely to be a sustainable differentiator. However customer service, dealing with peoples emotions, explaining things to their personality, understanding their context and mindsets, dealing with investments in the context of their financial and tax affairs, I would suggest will always remain a value added service that many regard will never be replaced by electronic methods.


The key point here being that value is not judged by the consumer, not the provider, and that it is often difficult to define, articulate or measure when it is about each individual. Personalisation around the consumer in many different forms is the key to sustainable service and value.


One thing is for sure is though is that with such context, a lot of the 'Robo Advice' is then clearly positioned not as 'Robo Advice' but as 'Robo rules and customer servicing', which one would argue that like Amazon.com and the many on-line offers in every industry, is just necessary to be competitive. It may also suit a customer segment that knows what they want and are happy engaging this way.


However the big question then comes is what does a 'robo' channel do when the 'robo' channel is  fully served has saturated that customer segment. Naturally, like I am lead to believe that Amazon.com is doing in buying up physical stores, in investments, it means hiring more 'Advisers'.


So what I think we are seeing here, is more a refinement here of the multiple engagement methods, that have evolved in many other industries, happening in wealth and investment management. My suspicion is that in 5 years time, like most shopping brands today, most wealth and investment brands will have 'Robo' as a service line, as well as advisers, and probably a few other ways such as chat, on-line interactive etc. for customer interaction and engagement.


So 'Robo', like buying stuff on the Internet, is not likely to be so much as a disrupter, but become an essential way for all brands to interact with a segment of their client base, that ultimately all players are likely to need. Naturally we anticipate then a demand for packaged 'Robo' technologies on a 'buy' vs 'build' basis, which we are Financial Simplicity are well prepared for. Come and talk...

New era of Retirement (and Investment) Solutions

We are just launching our new era of technology solution to support what we see as a new era of retirement and investment solutions.....


What's new ?


Well, a few things are happening around the world:

1) that it is increasingly being recognized that many consumers are asking more questions about the fees that they are paying for advice and investment services, and assessing value for money. In fact not only is it consumers, but regulators are onto this also and there have been some high profile cases recently where providers are being caught out. Ultimately it is being recognized that across the investment industry, it is moving to you have to be doing something ongoing to get paid on going.

2) Services are getting personal. In reality if a service isn't personal, it looks rather like a product, which is a problem given the above. And personal means that it means something to the person, which is most likely to be different for each investor depending on their circumstances


3) this is encouraging those who recruit clients to introduce an ongoing service into their proposition, which in many cases is about portfolio management as opposed to product selection


4) regulators globally are reconsidering the terms of retirement solutions in terms of the mandating of annuities, timing of releasing retirement pots etc, introducing more options for consumers and their advisers


5) whilst people who are accumulating assets may be regularly seeking to increase their investment or retirement pot, increasing numbers of people are relying on drawdown of capital to fund retirement or lifestyle needs in a low interest environment


6) this is encouraging a new era of investment / retirement solution that combines active portfolio management, personalized to each individual, to their level of investment sophistication, with the cash flow realities of monies being placed into and withdrawn from the investment and retirement pot


Now combine this all together, recognise that everyone's timing and cycles of cash flow adjustments is likely to be different, the assets may be held in multiple platforms for different investment types, multiply by thousands of members / investors, and overlay the increasing demand from regulators to ensure that this all operates squeaky clean....


If you are recognising this problem, and looking for a solution, I'd be happy to talk.










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A blast from the past

I was just looking back on some of the articles I wrote nearly 10 years ago. Check this one from August 2006 out and compare with what happening in the industry today..

Is portfolio compliance a 'state' or a process ?

A lot of people are asking me at the moment about what portfolio compliance is, and you may want to read my white paper here

Well for professional money managers to date, simply put portfolio compliance is making sure a client's investment portfolio is in accordance with any mandates or instructions that you agreed with them.

Simple ? Sometimes yes, but not that easy in a world of volatile markets, changing investment policies and research, and also changing investor circumstances, especially if that investor is a tax payer in the western world of modicum wealth. This is all highlighted with increased regulatory scrutiny also.

Why do these things make it harder ? Well apart from the simplicity of 'Does the investment portfolio fall within the prescribed asset allocations and densities' at a point of time, there are the issues like the below that need to be considered:

• if and when I want to change the investment portfolio, I may need to think about some sensible thresholds for trading so the portfolio does not get negatively impacted from transactional costs (often brokerage). Many would argue that there is little point in keeping in mandate if the costs of doing such are adversely detrimental to it's health !
  
• If the owner of the portfolio is a taxpayer, perhaps paying as much as 50% in capital gains tax for poorly timed sales, then my reputation as a money manager may be at risk if I am not considerate of this when trying to keep within asset allocation mandate. I am sure that consumers would be happily outside mandate to avoid paying a tax bill that after consideration of such would significantly impact the portfolio value or desired outcomes

So is portfolio compliance a state ? Yes from an investments perspective, is it a process ?, well probably if you want to lead your client to their outcomes as opposed to just investment outcomes based on an investment mandate.

Clearly there is an introduction of 'other' items now to be considered in consumer portfolio mandates if a money manger is going to seek to deliver the best outcome (not necessarily performance) for an investor, and these need to be put in the context of that investor.

We are already seeing with the more forward thinking clients of Financial Simplicity that in consultation with their clients, it is not only about agreeing an investment mandate, but also agreeing to what extent that mandate is legitimately deviated from in the investor's best interest.

So back to the question, then is compliance a 'state' or a 'process' - well in my view, moving forward for consumers, it is more about a continual process of trade offs that need to be carefully and constantly considered to resolve whether the portfolio is in a state that would be regarded as best fit for the consumer's desired outcomes.

If you are facing these challenges in your business and  wondering also how to achieve constant 'compliance' monitoring of investor portfolios considering this new era of mandates, with more regulatory pressures, drop me a line.

Implemented Portfolios

I am a really big fan of all of our clients. One, Implemented Portfolios has some great videos. See them in action here..

https://www.youtube.com/channel/UCK5hLVWoEkfWLzmFyBRdkoQ

http://player.vimeo.com/external/111703116.hd.mp4?s=4933298f6f5ba821fa23f7b0777b81cc

http://player.vimeo.com/external/111702624.hd.mp4?s=9fdacecec8224ced37a2b18a28b9cb6f

Financial System Enquiry in Australia – Another Catalyst for Financial Simplicity

With the Murray report out just before Christmas, it has now given me some time to digest it and some of the recommendations.

Clearly there is notable mention of the retirement income system, superannuation, and some of the key components that support such and just general investing, which I suspect will have some fairly considerable ramifications across the investments and wealth management industry. Whilst I understand that there is much more work to be done in determining which recommendations will be adopted, and how they will be implemented, I thought I’d take my interpretation of some of the points with a view to outline what the emerging industry structure could look like, and highlight how Financial Simplicity is well positioned to be the cornerstone of wealth management business models moving forward.

If we look at some of the recommendations and objectives relating to investments and retirement that come from the report, we could break them down into a number of levels, each with key themes:

 

SOCIETAL = resilient 

REGULATORY = tool sets 

INDUSTRY STRUCTURE = data access, efficiency

INVESTMENTS = Product target markets and impact investing

WEALTH PRACTITIONER / PROPOSITION = Efficiency, alignment with consumer outcomes, suitability and appropriateness

CONSUMER = engagement, technology neutrality,  scaled advice, digital identity,

 

And for each item, let me put a certain perspective on them:

RESILIENCE – a take on resilience is meaning that not only is this about resilience from shocks in the markets, but also resilience in terms of the combined public and private investments supporting a population for many generations to come. Whilst there are many angles on this, a key desired outcome for this has to be about reducing overall costs of the process of investing and holding investments, whether for retirement or other investing. You could look at this challenge in another way: for every dollar that is lost in an investor’s account to fees, it is potentially another dollar that the government may have to provide in the future to support the investor. Another aspect of resilience is about simplification of the industry structure to have less layers between investors and their monies (in order to reduce risk of failures), and remove repetition of costs.

REGULATORY TOOL SETS  - a take on this is to extend current regulation and monitoring about the sale of individual investments to investors, to that of overall ‘whole of client portfolio’ regulation. We are increasingly seeing this being introduced into the regulatory agenda around the world, and the FSI report is perhaps suggesting that either the regulator themselves may be equipped with the tool sets (and technologies) to monitor investment advice on a holistic basis, or the need for organizations, in a similar way that public companies are required to have independent audits of accounts, to have independent audits of the way clients are provided holistic investment solutions.

DATA ACCESS- Whether it be about performing better analysis to improve decision making, or just keeping people informed about investments with improved transparency, the processes and technologies to perform such activities are very much dependent on data access. My take on this is that the industry will both be easier to deal with, will foster innovation, and service consumers and their advisers with increased and cheaper data access.  Whilst the trend is going this way regardless as business seek to achieve operational efficiencies, I’d like to see that there even be an obligation on different participants in the investments industry to make data available to consumers or their authorized service providers in order to accelerate innovation and openness.

 EFFICIENCY – going hand in hand with data access and availability is the natural pressures on the investments industry to become more efficient. With a related impact on overall societal resilience, and technology neutrality, I’d suggest that investment proposition models or offering types that are operated with greater levels of efficiency should be encouraged, and where appropriate (i.e. in consumers clear interests) even given preferential treatment or relief from the overheads and process that has been accumulated over the years in more conflicted investment offerings. A good example of this is the opportunity to introduce a lighter compliance framework associated with the provision of an investment portfolio to a consumer that follows an agreed and published (often from a third party) mandate with the investments held by the consumer themselves, and perhaps even monitored by the regulator. Whilst this requires the operator of the proposition to have a level of ‘discretion’ to adjust the portfolios when required, it is a far cry from the risks associated with providing an investment adviser with discretion as to what may be bought and sold from the entire investment universe.

 PRODUCT TARGET MARKET – I really like the idea that where an organization is manufacturing an investment product, that it is done so with a target market and / or even specific purpose in mind, rather than just seeking to outperform a benchmark. I guess from this we may see different benchmarks emerging that are more consumer orientated, and we will see I suspect increasing obligations on product or proposition manufacturers to ensure their products are being ‘used’ appropriately. I do however question if such overhead is introduced, whether this is just a stepping stone to the collapsing of the product distribution industry model to a point where all players are having to develop consumer relationships (with the associated margin of doing so) in order to cover such costs. I suspect that this will be the case and we are already seeing many asset managers go ‘back to retail’.

 Clearly a product or proposition that is designed to adapt to specific consumer needs has a larger market, and so the growth of client customized investment solutions I suspect is inevitable.

 The debate between active and passive investing is not new, however clearly when looking at investment products consumers will not only want to be aware of asset class exposure, but also are they exposed to the risks and costs in their product of seeking to achieve outperformance and whether this is appropriate for them.

 IMPACT INVESTING – I just like the idea of this, and think that more consumers will be attracted to invest in initiatives that can bring societal and social benefits rather than just financial ones. I wouldn’t be surprised also over time if the charter of shareholding, or that of having investments in something include the ability for shareholders / unit holders to represent their views on subjects to help management make decisions that are in the interests of their investing stakeholders.

FOCUS ON CONSUMER OUTCOMES – Whilst a lot of shift in mentality and behavior comes around from the removal of commission on products (as dealt with by FOFA) – which eventually means if your customer doesn’t really value what you are doing, you don’t get paid !, The implied point here is that if a business is part of an investments supply chain, if what you are doing doesn’t create consumer value then you will have to question the sustainability of your business model. I notion that there are in general 2 types of functions in the supply chain, ones which are procedural and ones that require an element of consultation with (or consideration of) the end consumer.  If one follows that the best person to best deal with the consumer is the one who has the relationship with them, then we will naturally see a gravitation of the consumer facing decision making processes towards either the consumer themselves, or the advisers and service providers that service them. This is likely where the higher risk, higher value activities will occur in the future, and require as the report suggests increased educational and quality standards to deal with such. But what does it say for everything else in the supply chain. This shift to consumer empowerment means downward margin pressure and commoditization on the industry supply chains as the consumer outcomes are often (within the bounds of risk management and regulation) about lower costs, less fees and more retained value in their investments.

 SUITABILITY – this is the other side of the coin from the discussion about product providers needing to define target markets for their products. My thought process here is that suitability will extend beyond not only risk profiling of individuals, but more about ‘pots’ of monies with specific purposes, outcomes and attitude to both asset class risk, but also what degree of speculation is sought within such asset classes, liquidity etc.

 CONSUMER ENGAGEMENT – Whilst the report mainly focuses on superannuation fund member engagement, there are clear tones that increased engagement is good for confidence in the overall system and consumer experiences, perhaps even leading to consumers taking more responsibility for their financial affairs. My thoughts are that this engagement has to be:

-        accessible

-        simple to understand

-        supports consumers understanding the decisions that they have to make, and helping them make them

-        be coupled with educational materials

 If some of the new websites around the world are something to go by, consumers are increasingly making decisions about their providers on the consumer engagement experiences, and combining this with further choice and data access, means that the consumer engagement experiences could have material impact on customer recruitment and adoption moving forward.

 SCALED ADVICE – Coupled with consumer engagement above will be growth and acceptance of on-line algorithmic decision making about investments. Whether regulation gets ever to the point of prescription of any formulas will be doubtful, however I suspect many organisations will travel the trajectory of the scaled advice path, adapting to various glitches and cases along the way that will start to define the acceptable boundaries for such. Whilst we are seeing a number of on-line sites that essentially blend some form of scaled advice with their investment offerings to make it commercially viable, it will be interesting to see what emerges in terms of isolated scaled advice on it’s own as a process without being tied to any investment, what will be it’s cost, and what protections it comes with. I think we will see considerable challenge to the various models and philosophies that emerge, and suspect over time such scaled advice processes will need to adapt to the knowledge base of a consumer user.

 

TECHNOLOGY NEUTRALITY – The mentions in the report about technology neutrality I think are great, and perhaps will push the investments industry to move in line with payments and other financial services. This is a complex one when it comes down to disclosure, but in terms of post account set up authorizations, however like the payment industry, I suspect we will see considerable innovation in terms of consumer approvals via mobile phones or other electronic devices.

 DIGITAL IDENTITY – Should this eventuate, I think it would be excellent in terms of consumer outcomes and efficiencies across the wealth and investment industry. This is not an insignificant challenge though and will take some effort.

 

SUMMARY

 Whilst the above points is not exhaustive or complete, and I have applied a broad degree of interpretation, the general themes that I see progressing can be summarized as:

1)    the industry will continue to move from professional sellers to professional buyers on behalf of their clients, placing cultural and change on industry participants that have grown from a sales orientated history

2)    increased obligations for consumers will bring much of the subjective decision making closer to the consumer in order to be practical and cost effectively compliant

3)    Consumer interaction and on line experiences will significantly impact customer recruitment and satisfaction

4)    Such consumer centric subjective decision making will be increasingly under the scrutiny (and monitoring) of the regulators, perhaps with regulatory technologies with detect and prevent controls

5)    The industry structure supporting such consumer interactions will be increasingly automated and open architecture

6)     Government, consumer and societal resilience pressures will continue to drive down costs and margins on this infrastructure

FINANCIAL SIMPLICITY READINESS FOR A POST FSI WORLD

 I very much welcome the FSI report as further encouraging and opening mindsets of change in the overall investments and wealth industry. I see such advancements being a) a good framework for incremental changes; and b) essential to ensure long term resilience of the country and the role of the financial system in supporting the countries people and activities.

 At Financial Simplicity, we have been working hard for over 10 years now in anticipation of a lot of these trends, and helping investment industry participants develop wealth and retirement propositions, with associated operating models, to support such driven largely to date by their own instincts and values, which now may be form part of regulation and law.

 Our whole concept of mass tailored portfolio management combines many of the themes furthered in the Murray report, that of consumer interests, efficiency and regulatory controls in a way that ultimately provides better outcomes for all stakeholders. With increased data access and industry connectivity, we see a bright future for wealth and investment advisers that can use our techniques and technologies to provide better consumer outcomes, better business outcomes and with some advancement, most likely a much improved regulatory outcome in terms of risk management and costs to implement.

 

 

 

 

 

And the Future is about......

So, here is my call for the next decade.....The future of wealth management discussion (even policy) and  marketing will shift from people's wealth to their financial 'well being'.

To some extent we are already seeing this. Some examples include in the latest AFSA retirement blueprint report (great report !) it talks not about wealth in retirement but affordability of income streams , and increasingly also there is much reference in governments that are being concerned about what is the burden on governments (and hence future tax payers) of supporting those who have retired from work. There are many more cases where we are seeing these macro considerations coming to the front.

So, what does this really mean and what is really different in financial 'well being' from 'wealth management' ? Well strangely enough what it means is that one moves to the end investor's 'being' and not just their wealth being an increasing part of the puzzle, but as you may ask, what does this 'being' mean in practical terms ?

Well as a friend and adviser of mine (an Actuary married to a professional in social welfare) in the UK commented at the end of a talk about the future of the industry, it means less about numbers and statistics, and more about counselling and human welfare. Yes, it means actually moving from beyond those who manage other peoples monies being a 'record' in a system (ie a unit holder of a fund), and more about understanding the people, their motivations, their way of communicating, their inner beliefs, their drivers, where money fits into their lives and minds, their ..... 'being'.

So then, how does one test  whether a business can really practice what they may preach in this regard ? Can we just put a new term up on a website and brochure and suddenly say we are in the business of financial 'well being'. I suspect the answer for many will be just that, but  in the same way that we all know the difference between those people who say they are 'good friends', and those who actually really are, I think that earning the right to allowing people to help them with their 'being' will have to be demonstrated before really being believed.

And this largely comes down to behaviours and reputation. Behaviours that over time show that providers have earnt the right for consumers to open up about the 'being' and reputation that they have not performed acts that would conflict with a position of improving people's 'well being'. Consistency I think is key here to be believed. But this is not easily achieved, and especially hard to achieve if a firm has been in a position where many would argue that the practices of the past have perhaps swayed the balance of stakeholder towards shareholders rather than consumers and their 'being'.

I expect to see a raft of  new brands, new terminologies, perhaps even new regulations in this very difficult formula about a person's 'well being'. I suspect over time it will also require greater accountabilities of consumers (and disclosures) to also both help providers determine and communicate what their 'well being' is, and take responsibility for such as well.

Future Proofing Your Business From Regulatory Change

One of the fundamental pillars of financial markets working is consumer confidence in the integrity of systems and participants. Without this confidence, there is a lack of participants, it has for capital to be raised or traded and confidence in markets and the systems can be dented - we may remember  what happened to the credit market in 2008 due to the discovery of the in-transparent nature of credit default swaps, leading to a ‘run of the banks’ in some parts of the world.

In July, I introduced on the blog the concept of the ‘Social Regulator’ and how the industry is reforming – not only in response to regulation, which is largely reactionary, but also through leading indicator of how business models should develop is relation to what is reasonably acceptable to both consumers and public opinion generally (who are increasingly being championed by the media in the face of high profile advice scandals).

The latest validation of this thinking in Australia is the defeat of widely anticipated watering down of Future of Financial Advice (FoFA) laws in the Senate, which means Financial advisers must now fully comply with Labor's original version of FOFA. With the ammunition of recent scandals still very much in the papers and social consciousness, Labor, the Greens and four crossbenchers, argued the Coalition's proposed changes would leave investors vulnerable to a future financial collapse.

It means that on balance, the politicians believe that the fundamental pillar of confidence, which is so necessary in properly functioning financial markets, is broken. In the case of CBA and Macquarie, despite the vast resources of these institutions, if they cannot be trusted to act in the public’s best interest in the pursuit of profits, how can anybody argue something isn’t broken here?

Some anecdotes being prescribed for the industry point to more training, regulation and red tape, and some, such as a public register of advisers, are an attempt by the industry to appear more professional and transparent.  Our views are that whilst a step forward, these seem more like a band-aid solution when what is really needed is a fundamental rethink. 

For firms trying to decide on a winning business model going forward, the environment may appear stifling, with FOFA still around and FSI and who knows whatever else around the corner. This creates a dilemma in many financial advice organisations in terms of how can I achieve the right balance of compliance and business competitiveness? The trend at the moment is to hire more compliance staff (at the expense of advisers and other revenue generating headcount) and commit to ‘higher training and professionalism standards’. With margins in financial services already compressing fast, the last thing advice businesses need are more non-revenue generating costs.

Financial Simplicity believe compliance cost blowouts are first and foremost a cultural problem – not necessarily at the organisational level but rather at the industry level – and to improve compliance requires taking a step back and considering compliance in sometimes completely different ways.

If compliance frameworks exist to regulate and monitor the quality of advice provided to clients, but are largely administered manually through compliance teams, documentation and training programmes, this becomes a non-scalable and expensive solution, that will most likely have some holes in it's approach. The compliance effort is also a product of the organisational culture and leadership, and pressure to produce results can also see compliance pushed to the bottom draw.

Rather, Financial Simplicity views compliance as a fundamental embedded part of a firms operating model (ie EVERYTHING IS COMPLIANT) rather than a framework that is imposed on top with costly checking resources.. And because everyone else is so pre-occupied by keeping their compliance frameworks up to date, those with compliance embedded into their operating model, operate at a competitive advantage, with resources directed towards client and revenue generating activities.

Financial Simplicity has, for more than a decade enabled embedded portfolio and investments compliance to be automated and systemised in our clients’ businesses, to the extent that they don’t even have dedicated compliance resources or think about compliance in terms of explicit costs or periodic audits - they just know it is all OK. It is embedded directly into their revenue generating advice activities and often taken for granted as compliance is an ‘outcome’ that is systematically applied through automated and technologically-driven processing.

If you are currently concerned about how to ‘future proof’ your business and revenue against future regulation, it may be time to talk to Financial Simplicity about how we can radically reduce your compliance costs while positioning your business for growth.