Some easier steps along the path to in-house investment management – 8 February 2017


This article is a reprint from Professional Planner, which can be accessed by clicking on this link.

Over the last decade, numerous independent financial advisers (IFA) have taken the investment management function in-house, setting up multi-asset portfolios, supported by managed account platforms (but not exclusively so) to better manage their clients’ wealth. This trend has been well documented, and has resulted in the strong share price performance of most listed managed accounts providers, whilst advisers’ revenues have also risen, to the detriment of managed funds and traditional platforms, which are losing business to these new providers.

Four factors have converged to make the move to bring investment management in-house possible:

  1. The rise of nimble, hungry managed account providers with the technology, regulatory and administrative tools that make it possible for advisers to launch their own public offer, multi-asset portfolio services, for little capital expenditure
  2. The need for independent advisers to stay financially viable when competing with cross-subsidised institutional wealth managers, by providing a standalone, separately priced investment offer, considering Future of Financial Advice changes to conflicted remuneration
  3. The desire to lower investment costs in a competitive environment, which has led to an increased use of direct assets – including direct shares, listed investment companies, exchange-traded products, exchange-traded funds, real-estate investment trusts, bonds etc – which managed accounts typically favour over managed funds
  4. The rise of small, yet experienced consultants (as well as the traditional research houses), with experience assisting advisers with asset allocation policy settings and investment selection and monitoring.

Together, these factors have made it possible for smaller IFAs to vertically integrate, to the benefit of both their businesses and their clients’ wealth, without requiring a large capital expenditure. This trend will probably continue apace, and may even result in some large practices leaving the institutional wealth managers, as they seek to take more control over various aspects of their business.

Where do advisers learn to take this function in-house?

The transition from being an adviser using balanced or sector funds under a traditional financial planning model (e.g., issuing Statements of Advice), to one fully accountable for an implemented investment solution is not trivial. There are many decisions to be made (such as choice of managed account provider, mandate guidelines, consultants, etc.), and internal organisational changes to get right.

Most critical is the need to adopt a robust investment policy framework (IPF) that clearly enunciates the investment strategy the firm will adopt to achieve the mandate objectives. In our experience, there are few ‘off-the-shelf’ guides to walk advisers through a detailed process of setting up an IPF. Such a guide should include the adviser’s investment philosophy and beliefs, linked to a coherent set of investment policies, such as mandate objectives, allowable investments, asset allocation approach (static v dynamic) and ranges, selection and monitoring process, risk management and governance.

These factors all inform the investment committee in its decision-making, as well as serving as a valuable communication tool for clients and employees. The investment committee also needs a charter to ensure that the agreed upon parameters are followed.

To date, managed account providers have provided compliance-led policies and charters for advisers to use, as they are most at risk as the issuer of the adviser’s product disclosure statement. Many of these documents are boilerplate in their design. Furthermore, these policy documents are generally not available for public consumption, so advisers must work many of the details out for themselves, or appoint consultants or research houses to assist them in setting up the investment framework.

It’s fortunate that there is already enough publicly available information to assist advisers in starting to think holistically about the investment model they wish to adopt. See the Future Fund’s statement on its investment model as one example. Over the coming months, taking information from public sources – including industry funds, robo-advisers, sovereign wealth funds and dealer groups – Winston Capital, in conjunction with Professional Planner, will provide a guide to assist advisers in creating a robust investment framework (from compliance to competitive advantage) prior to engaging with any service providers.

In doing so, we hope to improve the management of client wealth in the retail sector in Australia, and give advisers an easy-to-use guide that takes high-quality examples of what is required to manage wealth in a complex operating environment.

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