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.