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Pivot back to quality, strategic advice
BY DAVID WRIGHT | MONDAY, 19 APR 2021   3:01PM

The ability for financial advisers to deliver timely and effective advice to their clients continues to be hamstrung by the expanding compliance burdens ever-present in this industry.

This regulatory and compliance framework is also encroaching on the managed account space, which has prompted a marked increase in the initial and ongoing reporting and administrative requirements advice practices must manage.

As the marketplace continues to evolve, so too does the upfront documentation and governance requirements for advice practices. We estimate that these growing compliance hurdles now represent a minimum 40-hours of upfront due diligence before a managed account is operational.

The required documentation typically entails an FSC manager questionnaire, portfolio mandate sheets, business profitability and continuity plan, insurance adequacy coverage and production of a PDS. Throughout the journey, the Responsible Entity (RE) will also periodically request portfolio analytics, such as historical portfolio performance, attribution, stress testing and liquidity analysis.

Compliance headaches exacerbate inefficiencies   

For a firm new to the process, meeting these requirements can be labour-intensive - if not impossible. Furthermore, the RE will conduct an initial formal governance review meeting to assess the model manager and interrogate the robustness of the proposed portfolios, investment personnel credentials and experience, and scrutinise all aspects of their operations.

The RE will also need to evaluate the firm's corporate governance, people and processes to ensure they're suitable to run managed accounts. Understandably, an advice practice unfamiliar with this terrain will likely experience multiple missteps along the way, which can materially lengthen the process, or ultimately, result in failure.

This similarly applies to the ongoing regulatory responsibilities associated with managed accounts - which are equally time-consuming and include an ongoing annual governance review to ensure the business and portfolio performance remain robust.

If the RE isn't satisfied with the results of this formal process, this can challenge the longevity of the managed accounts and throw the underlying investors into disarray. This is in addition to mandated performance commentary and reporting, which at a minimum, must be produced quarterly.

Revolutionising the advice process

Clearly, there's minimal value-add from the client's perspective when their adviser is dedicating an increasing portion of time in navigating these complex compliance and administrative obligations. Fortunately, advice practices can outsource these onerous and time-consuming duties when partnering with an experienced and quality investment manager for their managed account solutions.

Outsourcing this function helps alleviate the burden on advisers and shifts the onus onto a skilled investment manager to optimise the process and enhance efficiencies. However, it's crucial that the investment manager is experienced in coordinating a transition to managed accounts, otherwise the process can become needlessly complex and frustratingly slow.

Pay less, get more  

A lesser-known benefit of utilising an outsourced investment manager is the opportunity to access fund manager investment management fee reductions (usually via rebates on fees). Though this is highly dependent on funds under management volume, which is more achievable via managed account portfolios. A well-established investment manager will also offer relationships with the industry-leading fund managers where they can negotiate investment fee reductions on their management costs.

Alternatively, discounted unit classes are also becoming a popular method for fund managers to provide preferential treatment to their larger investors. However, these are only accessible via agreed arrangements with fund managers and the respective platform.

Often these arrangements will cover the investment manager's fees, thereby creating a cost-neutral outcome for clients whilst enhancing advice delivery, portfolio reporting and client engagement. Again, the scale of the investment manager and the industry relationships they've forged will be vital in obtaining any meaningful fee reductions. This highlights the crucial nature of partnering with a well-established and respected investment manager to achieve the greatest cost reductions for your clients.

These efficiency gains aren't restricted to governance and reporting procedures and extend into portfolio management improvements too. Through outsourcing the investment management, advisers can optimise the provision of timely and effective investment changes and portfolio rebalancing without the compliance stress.

Reporting is likewise streamlined and operational efficiencies achieved, through introducing an experienced investment manager into your advice business - one who you can collaborate with to achieve the most effective managed accounts solution. This allows each input into the practice to play to their strengths, whether that's the adviser, the platform or the model manager.

Rethinking your value proposition

For advisers feeling challenged by the increasing regulatory environment, a managed account solution can help navigate this constantly evolving landscape. Importantly, it's vital that the advice business partners with a reputable investment manager who is experienced with the process, offers competitive scale, and has a well-entrenched industry presence to leverage greater rebates.

This provides an extremely scalable and cost-effective solution for an advice business and facilitates a pivot back to advisers providing strategic advice and deepening their client relationships - which after all, is exactly where they can add the most value.