The business efficiency benefits of Multi-Asset Managed Accounts for advice firms are widely known. When these advantages are also on-shared with the end client, Multi-Asset Managed Accounts represent a compelling value proposition for any forward-thinking planning practice. It is therefore no surprise that these structures have had a stellar rise in take-up over the past few years.
Until recently however, the proliferation of Multi-Asset Managed Accounts has been largely focused on “fund of fund” solutions. That is, managed account products that invest in a number of underlying funds. However, there is another approach that can contain significant additional advantages for advisers when done properly, which is multi-asset portfolios that incorporate direct securities into their core investment process.
For the purpose of this note we are referring specifically to portfolios constructed using a mix of direct stocks, listed ETF’s and only a very limited allocation to external active managers. Under this approach, external active managers are only used when it is believed that a significant alpha opportunity exists, and is usually limited to asset class exposures where ETF’s or direct securities are not appropriate, eg Alternatives.
A Portfolio for the Times – Benefits for Advisers and their Clients
In the current environment it is extremely important that any product an adviser recommends can be clearly demonstrated to serve the client’s best interests. At the same time advisers are under increasing pressure to demonstrate their own value proposition. For a number of important reasons, Multi-Asset SMA’s which incorporate direct securities can help meet these dual aims.
Client Best Interests
While there is much conjecture around what exactly constitutes “best interests”, it is clear that both cost competitiveness and after-tax returns are key factors. Failure to address these twin considerations risks winding up in the cross hairs of the regulator, particularly if there is a perceived benefit to the advice business of recommending the product.
Unsurprisingly this is causing consternation. Not because advisers don’t have their client’s best interests at heart, but because often it’s very difficult to show that a strategy is the right one until after the fact. This is especially the case when it comes to investing, which inherently involves an element of risk.
Understandably, many advisers are now choosing to narrow their focus in on costs, an obvious path of safety, given that cost is the one component of investing which can be determined with certainty before advice is provided.
At the same time increasing regulation is demanding greater cost transparency within products themselves. The application of RG97 means that financial product providers, which includes SMA issuers, are now required to include the management fees of all the underlying funds held within the product in the Indicative Cost Ratio (ICR) of the Managed Account itself. This is exposing the high product costs of “fund of fund” SMA’s. Whereas previously only the headline multi-manager fee may have been included in the product disclosure statement, now the ICR is an “all in” figure, which must be disclosed in client Statements of Advice.
This is where Multi-Asset Managed Accounts constructed mostly of a mixture of ETF’s and Direct Equities can provide a distinct advantage. Unlike “Fund of Fund” SMA’s, they are not nearly as adversely impacted by RG97. This is because there are no underlying ICR’s associated with direct equity holdings and ETF’s are typically very low cost. Assuming the headline manager fee is competitive, the “all in” cost can be significantly cheaper than “fund of fund” solutions paying large fees to external managers. Despite the competitive fee structure however, the client still benefits from active management. Assuming the SMA manager incorporating direct equities has the requisite investment skills and can demonstrate alpha, then it could be argued this approach represents the “best of both worlds”. That is, active management at close to a passive price. See Figure 1: Projected Costs of Solution (Indicative Only).
Figure 1: Projected Costs of Solution (Indicative Only)
Enhancing the Adviser’s Value Proposition
Another important consideration for any advice business is the ability to demonstrate an ongoing value proposition. If an adviser cannot demonstrate the value they provide to his or her clients, then not only does it beg the question of whether they are acting in their client’s best interests, but it also risks the future of their business as a going concern.
In the race to reduce costs, many advisers have begun to abandon active management altogether, instead opting for portfolios made up purely of passive ETF’s. However there are risks for advice businesses adopting this strategy. If a client’s portfolio simply mirrors that of a cheap online robo-adviser, how long before the client questions whether they need to continue to engage an adviser at all?
A key advantage of Multi-Asset Managed Accounts that incorporate direct securities is that they can help the adviser protect and amplify the adviser’s own value proposition. This is because they allow the adviser to play an enhanced role in the ongoing investment communication and governance oversight of the portfolio, particularly in the case of private label offerings. Forward thinking SMA managers can ensure advisers are kept abreast of the investment rationale for all current holdings and any changes as they happen, allowing the adviser to become the conduit for this information. Technology can help make this process easy to the point of being seamless. For example, each time a trade is made in a direct security held within the portfolios, the adviser can be notified, and choose whether or not to communicate this with their clients depending on client preferences. There is also scope for the adviser to remain more informed regarding the composition of the portfolios, due to greater transparency and the fact that they will be dealing directly with fund manager, rather than an asset consultant. This then allows for a deeper discussion with clients.
In the case of a private label solution, the advice business may choose to play a role in setting the investment mandate. Representatives from the business can also sit on the investment committee, playing a governance role. While this is also possible with “fund of fund” structures, the level of granularity is far greater with an SMA that incorporates direct securities.
While the impact of more closely tying the adviser to the investment value proposition is considerable, the time commitment required of the adviser is little more than that of a “fund of fund” solution, enabling the adviser to focus on servicing their clients in other ways and on growing their business.
Figure 2 illustrates the three pillars of an Adviser’s value proposition when it comes to investments. A comprehensive Multi-Asset Managed Account solution that incorporates direct securities can help an adviser play a role and demonstrate value at all three tiers.
Figure 2: Three Pillars of an Advisor’s Ongoing Investment Value Proposition
Increased Client Engagement
The proliferation of smart phones and devices, as well as improvements in online platform technology, has led consumers to expect greater engagement opportunities from their service providers. The enhanced transparency that comes with owning visible direct securities feeds into this theme. Tech savvy millennials can jump onto their smartphone and view exactly which holdings they own. Older clients also enjoy remaining more informed, for example it allows them the opportunity to discuss with their peers which stocks have been the best performing in their portfolio this year.
Furthermore the inclusion of direct securities in SMA’s allows for greater expression of individual client preferences. This is especially timely given the growing social and ethical considerations of investors. Instead of having to defer to the standardised screen of an ethical fund manager, latest gen platforms allow for the specific exclusion of individual companies on a client by client basis, ensuring they line up directly with the investor’s preferences and principles.
If you would like to speak to Resonant about its Multi-Asset Managed Accounts that incorporate direct securities, please get in contact.