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Managed accounts and the shifting adviser proposition

Managed accounts and the shifting adviser proposition

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By Sarah Kendell ·
June 02 2021

Managed accounts and the shifting adviser proposition

In conversation with ifa ahead of his presentation at the Adviser Innovation Summit, Implemented Portfolios’ Phil Pilgrim reflects on how far managed accounts have come in the last few years and how advisers can best optimise them for business growth as they enter their second phase of evolution.

Managed accounts and the shifting adviser proposition
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Managed accounts have reached almost a maturity point – we’ve gone past that initial stage of advisers wondering what is a managed account and how does it work, and got to the point where we’ve got a critical mass of adoption. For the minority who may not be using managed accounts yet, why are they still sitting on the fence about using them in your experience?

There’s a couple of answers – I’ll probably focus on one particularly in my view. You’re right in your summation that theres a lot of been a lot of growth in managed accounts. That being said though, we cant forget the acronym at the front. Are we talking about separately managed accounts or individually managed accounts?

But in terms of reluctance, on the one hand, managed accounts in a separately managed account model portfolio type sense, its a pretty easy leap for an adviser. Theyre already, in some cases, putting together model portfolios for different risk profiles using managed funds. So to see an opportunity where you can do pretty much the same thing, except provide direct ownership benefits through to your end client, it’s a pretty easy sell, isn’t it? To make that leap and say, “Were just going to go to something a bit more sophisticated, and instead of those six or seven managed funds and unitised pooled investments, lets get you something with direct ownership benefits, which pretty well worked in a very similar way in terms of a model that were built for you.” 

I think that is why it’s been an easy transition for a lot of advisers. The flip side of that is I think some advisers are looking at that and going, Well, whats in it for me in terms of real efficiency? If Im just replacing traditional managed funds with SMAs and still using models, then I really need to see that theres benefit for me in terms of efficiency gains as well”. Because what theyre currently doing is not necessarily broken.

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In terms of what you’re saying about what’s in it for me, we do get some of that cynicism with some of the reader feedback that we get around managed accounts which is, is this just a way for product providers to get in to clip the ticket in a new way essentially? How do you address that and how do you communicate to advisers that it’s not just a new way of packaging a product, it’s really a massive practice efficiency benefit?

That’s going to be depending on how they adopt and what they adopt. The cynicism to one degree is probably appropriate. If you’re doing it really well in that space with model portfolios of managed funds, maybe you are just seeing another product discussion that you’re just not up for the transition. It takes a lot of effort and you’re not seeing a lot of gain.

That’s when we start talking about an IMA, as an example, which is what I think is the natural next evolution of managed accounts to get to a more individualized level, because then it gets the adviser focusing on a client-centric investment asset proposition rather than an efficiency, “what model am I going to fit you into” proposition? I think that’s where you’re going to see a lot of change going forward. And the regulator is actually up for that – they’re pushing for that to be how advisers think, providing individualized solutions for your clients.

When you get to that individualised level, does that necessarily make it more of a complex proposition for advisers?

Yeah, so if you take the old 80/20 rule, you may be able to justify 80 per cent of your clients who are balanced, fitting into your eight SMAs no change, but then there’s 20 per cent of your clientele that need, deserve, want something that’s slightly more individualized because of their current circumstances. Then you find the adviser will spend 80 per cent of their effort on those 20 per cent that they’ve had to be individualized because once you step outside of your model, the efficiency falls over. And I think, again, thats why were seeing advisers who are already using managed funds in a similar way saying whats the difference for me? That’s why I see IMAs as a way forward, because its able to wrap up whatever the clients holdings are at an individual level, and then treat that individually in an efficient way within.

For some advisers who already may be using managed accounts, is it perhaps that they’ve had a bad experience in terms of taking on some of those ones that aren’t so customisable, and they’re finding that actually this isn’t delivering the efficiency that I was sold? Are there any challenges among existing users where they’re thinking, “I’m not sure if I’m able to get exactly out of this what I thought I was,” and how do you help those people?

So I think platforms have made really good progress in terms of adding a bit more automation to models, whether they be managed fund models or SMA models. That’s helping all the time, but not enough when you start being very client-centric and saying, “Okay, here’s the client, here’s their current situation.”

It’s not a case of, “How can I fit them into my portfolios that are pre-designed?” It’s, “What portfolio do I need to wrap around them to suit their circumstances and give them the right outcome?” So when you start to do that, you start to get yourself into what I would call the IMA space because effectively many advisers are already running IMAs, they just dont know it. Theyre just doing it manually, client by client, ROI by ROI, portfolio by portfolio and its really hard work. So theyre already doing the functionality of an IMA, just not in an efficient way. 

Whats your pitch when youre talking to advisers about why they should be using IMAs versus traditional managed accounts? Is it the ability to not make the client fit into the portfolio and really tailor the portfolio to the client more so than you can with other managed accounts?

In terms of that conversation, its one I have, if not every day, nearly every day, and that is helping advisers understand the business theyre in and therefore where they need to be spending their efforts. If we pull this back a little bit and start to talk about the time problems of advisers today, every single advisor you talk to says Time has never been such a problem for me. So if thats the case in your business, youre looking at any business, whether its financial advice or not, how can I rationalize that and try and reduce the burden of time that I have.

In this case its about, some people call it above the line, below the line. I call it high value activity versus low value activity. Where am I going to spend my time to get the right result, the best result? For me its easy in financial advice. Clients will tell you a thousand times over, I want you. I want time with you. I want you to listen to me. I want to talk to you. I want you to guide me. I want you to remove complexity for me. Theyre the things I want. Thats going to fulfill my emotional needs as a client. And thats something that Im prepared to pay you for.” Thats above-the-line stuff, high value activity.

The low value activity is things like investment management. When you get below the line, how much impact can you really have on the result? So if Im going to spend an enormous amount of time on asset management, for example, am I going to have a half a per cent impact on that? Some years I might, some years I might have a negative impact if I just left it alone to someone else. So thats low value activity to me and something that advisers need to think hard about how much time they spend doing it. 

If we then move on to, How am I going to outsource those solutions? You need a solution thats complete. Thats going to deal with 100 per cent of your clients. The problem weve got with managed accounts generally, the more traditional SMA version of managed accounts is its just a reiteration of a model portfolio of managed funds where it will be fine for a fairly big chunk that youre able to say, Okay, youre balanced, thats what youll go into and youll be the same as every other balanced client that I deal with. Thats not really the world were heading towards. And I think as technology is enabling us more and more, were able to more confidently have a conversation with client. Were not fearful of ending up with an individualized outcome in terms of how their money is going to be managed.

Thats why I think the IMA comes into its own because the IMA effectively is a wrapper, if you like, around everything the clients holding and then you set instructions for how you want the assets within that wrapper to be treated and managed on an ongoing basis. And then tech enables that to happen using an outsourced team to make those decisions and make those changes without the need to be continually going back to clients, getting ROAs signed, making those changes, doing it all manually. So thats why I think were headed more down that road. 

So it’s effectively being able to set parameters so that you can actually address the individual client’s needs and perhaps those clients who are a little bit pickier about, ‘I don’t want to just be in the portfolio you’ve put everyone else in. I want to talk to you about this stock. Or I want this excluded because of ethical reasons.’

Yeah. And even more so than that, the clients don’t necessarily know what’s possible. So are we having a conversation beyond risk profiling to help them understand what’s possible in this current world of investment management. They’re not complex themes that you can talk to clients about, but they’re able to then make some decisions or provide some guidance based on what youve taught them.

Youve got a job to be somewhat the educator in these relationships as well. And if you educate a client, even at a fairly high macro level on whats possible and they get to feed in to that, then again, thats a relationship thats much more client-centric. Theyre working with you then and they feel like youre allowing them to play a role in what happens with their strategy. So that makes a lot of sense in terms of being client-centric, not product-centric.

In terms of where the managed account space is evolving over time, how are the top practices that you guys work with using them to the best of their ability in their practice? How have those who got on board the managed account train early on now evolving that to the next level?

So I’m going to talk about the individually managed account trend that Im seeing because I dont see a huge amount of change in the SMA space. In the IMA space, though, I think more and more advisors are realizing their role, which is what I talked about before. And in realizing their role, theyre realizing the more tech enablement I can get around this investment management thing, the more I can outsource the ongoing decisions, be able to set instructions and just have them play out for me, without me having to keep going back to the pen and paper all the time, the more time Ive got with the clients.

The adviser whos very client-centric, everything they do within their business, every bit of their client experience theyre building out is very much a client-centric approach. Theyre realizing with those other things, low value stuff, I just need to get tech and outsource services around that as much as possible because every minute I spend there is a minute Im not spending above the line.

How are they positioning the managed account with clients? Do advisers actually explain to the client like, ‘I’m now using this investment structure when it comes to your portfolio.’ Or is it almost like you don’t need to go into that level with the client and what they really need to know is that the adviser is tech-enabled to make these changes quickly on their behalf and that’s all you need to go into?

I smile a little bit for this one because some advisers, quite a few have got that habit. When they get onto something new, they tend to want to explain it more. I’m not sure the client’s that excited about it.

I’ve had conversations before where an adviser takes on a new product solution of some description and they tend to want to explain it more because it’s new to them, but they would spend hardly any time explaining the seven managed funds that they put them into last year.

So I think youve got to be careful how you explain this. I think its more about demonstrating.

In terms of an IMA discussion, for example, you can have a discussion with the client to say, “Look, we use the right service that allows us to provide a really customized approach to how your money is invested, so lets have a talk about whats possible and how you would like your money invested. What are the things youd like to see happen and things you would not like to see happen?”

Then youre more or less just demonstrating the solution rather than trying to explain it to them because Im not sure the client really needs to know the logistics of how youre managing to pull off this amazingly bespoke solution for them. Quite frankly I dont think they care whether youre doing it on a spreadsheet and spending loads of time on it, or you are using technology to completely outsource it. Either way they like what theyre hearing though, which is, Youre involving me. Im getting something thats more individualized, because every client is different.

Are there types of clients that this solution is more suitable for? Because in times gone by it was more of a high-net-worth proposition, but I understand that’s coming down now in terms of the minimum investment. With the practices that you work with, is there still a ceiling in terms of you wouldn’t really use an IMA for someone with below this amount to invest?

So I’ve got my own personal opinion on this one, as do many advisers, on where this fits. But I think really if you just get down to straight out numbers, I think there’s a point at which, unless you’ve got a certain amount, the effort isn’t going to translate into a huge benefit. There’s an argument to say with lower balances to get more off the shelf solutions that are cost effective, but they do what they say theyre going to do and they provide a solid result. But as balances move up and Im probably talking $150,000 and creeping further, youre then more in a position, from a strategic point of view, of making more of a difference.

Naturally when youre having conversations with clients, these themes start to come out and you start to need to lean on more sophisticated solutions to be able to provide the right solution for them. So I think its just a matter of realizing where youre at and thats probably more from a clients perspective. If Ive got 50 grand, Im not sure if all the sexiness in the worlds going to make a huge difference, but if Ive got 500, then the effort can translate into more tangible dollars in terms of outcome.

If we look at where the advice industry is going and heading towards more above-the-line services, as we were discussing, from where you sit, do you think it’s a must-have for advisers to be using managed accounts if they really want to free up that capacity and scale up their practice to serve the number of clients that they need to be profitable?

I have got a bias, but that being said, I’ve been at Implemented for two years and after 20 years in the industry having run my own advice business, I was attracted to this business because of what they do. I certainly would have wanted this 20 years ago when I started my business, although it didn’t exist. 

I just don’t know what else you’re going to do. You either take on the load of the decisions you make in terms of how you manage assets and accept that that’s going to be a big grind on your time and you keep doing a manual IMA type solution. Or you say, “Right, I need to make a big step change here.”

And I think probably the number one challenge I hear from advisers in terms of this one is how Im going to sit in front of my clients and say, Look, I no longer do that. I outsource that to professionals. What I do is this, and that is spend time with you, helping you define your best life, helping you make the right decisions and building strategies for you to live that.

Thats a big step. You dont just decide today that thats what youre going to do tomorrow as an adviser and then your next review or progress meeting with a client you just dump that one on them and pull it off perfectly and it sounds great. Its like any skill. Youve got to practice it, youve got to learn it. Youve got to redefine who you are and what your value proposition is. But I think thats what the best advisers are doing exceptionally well. You hear lots of people talking about it and you see lots of great advisory businesses doing it really well. And theyve made that commitment.

And all of a sudden they realize, Hey, you know what? The clients really into this. The client loves me even more now because Im spending more time talking about the things they want to talk about and less time talking about the hygiene stuff that theyre not that particularly interested in. Hence why I like the idea of an IMA because it totally outsources and automates the most simple to the most complex client situations. So they really do have a 100 per cent solution rather than an 80/20 setup.

And do you think there is a misconception that clients are going to freak out when you say, ‘Okay, I dont have direct oversight on your portfolio anymore. Thats outsourced, and Im going to spend more time talking with you about your needs and your values.’ Do you think that advisers are like, ‘Im not sure how my clients going to react to that’, but then quite often, as you said, they react positively?

Id imagine why they would be negative on that. But if you look at the reality, I mean a service like ours, were writing to the adviser and the client every week telling them what were thinking and the changes were going to make. So the adviser is actually even more in touch with whats happening than they ever were before and in a position to be able to intercept proposed changes to the clients portfolio, unlike more traditional solutions where the changes just happen and you just find out afterwards.

So this is actually more forward in terms of, Were telling you in advance. Were working with you as an outsourced solution. So the adviser’s actually got better insight and control than theyve ever had in traditional investments that effectively theyre blind to because things just happen, decisions just happen and they just report back on them.

Thats a good point actually. And just to wrap up, what are some of your top tips for practices to get the most out of the IMA solution, if perhaps they have been reluctant to bring these into their practice or perhaps theyre feeling that they havent quite got the value out of it that they wanted to? In your experience, what are the best ways to go about implementing it and getting the most benefit out of it?

Weve already discussed a little bit, but your value proposition – understand really what it is and if youre not sure ask your clients, theyll tell you pretty straight. And you can do all the research online. Its all really consistent.

So once you get confident in the knowledge that clients want you to help them make great decisions and help them live a better life than theyre living now and give them that confidence and that certainty, then once you understand that value proposition, then youve got to head towards, in every part of your business, automation and using tech as much as possible to free you up and your staff for that matter, if youre a business thats more than just one adviser so that they can be completely client-centric.

I think the term for me is being client-centric and dont rob your time that you should be spending with clients. So find the solutions that are going to allow you to be freed up to do that as much as possible. And I think managed accounts and in particular IMAs are a great starting point for that because they give you control, oversight, transparency without the effort. I think that to me is a great start and frees up a lot of time.

Phil Pilgrim will present at the Adviser Innovation Summit, which continues in Melbourne on 13 July. For more information on the event, click here.

 

The ifa Excellence Awards are back in 2021 and nominations are now open! This prestigious accolade recognises exceptional professionals within the financial advice industry, shining a light on the outstanding achievements from the nation's best and brightest. If this sounds like you or someone you know, then nominate today for the ifa Excellence Awards 2021!

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