The past decade has seen managed accounts transform from a technologically viable but largely unexplored solution to one that is now fully embedded in financial advice models.
A key benefit of managed accounts is the efficiency they bring to financial advice practices. A large component of this efficiency relates to the fact that once a client is invested within a separately managed account structure there is no requirement for the financial adviser to issue a Record of Advice (RoA) when portfolio changes are made.
For the average advice firm with an average book size, this represents a serious advantage. Advisers can be high-energy individuals but contacting 80 clients every time a change is made to the portfolio is a tall order. Not only is it inefficient, but by the time the adviser is part way through the process of implementing the changes and notifying clients, market dynamics have changed, and previously identified investment opportunities have faded away.
This raises another significant advantage of managed accounts: responsiveness. Changes made to managed and SMA portfolios are instructed to all relevant platforms usually within two days after an investment committee has recommended a change. This means that advice clients can be aligned to the recommended portfolio structure almost immediately, allowing them to capture the full benefits of portfolio changes.
The advantage this provides for financial advisers and their clients goes beyond saving advisers time and making the process of portfolio implementation more efficient. Delays in implementation can cost clients investment upside, and in the long run can have a significant impact on investment performance and outcomes.
Measuring the cost of delay
While the cost of delayed implementation might seem like an academic issue, it isn’t. These costs are quantifiable, and they have a real impact on investment performance.
Lonsec conducted analysis using the Lonsec SMA – Australian Equities Core to illustrate the impact portfolio implementation delays can have on portfolio performance. The portfolio is an active concentrated portfolio investing in Australian listed equities. We have used actual portfolio changes recommended in December 2016 and then measured what the hypothetical excess return would look like over a three-month, six-month and one-year period under four implementation scenarios.
What these results show is that over a one-year period, implementing the portfolio changes with no delay resulted in an excess return of 1.3% above the benchmark S&P/ASX 200 Accumulation Index. This compares to an excess return of 0.2% with a six-month delay, a -2.0% excess return for a 12-month delay, and a -3.5% excess return if the portfolio change was not implemented.
Hypothetical excess return to March 2018 (delays to implement December 2016 portfolio changes)
Responsive implementation allows clients to capture the full upside associated with changes in dynamic asset allocation and security selection. This is invaluable in an environment where the expectations of advice clients for actively managed, tailored and responsive portfolio management are growing. Increasingly, advisers need to be able to justify the costs involved in providing advice, and this means being able to show that their investment solutions are fit for purpose and able to respond nimbly to market opportunities in line with the client’s investment objectives.
Responsive, contemporary, active
Financial advisers can harness the managed account model to create a more efficient financial advice business and create more time to focus on the individual needs of clients. But often overlooked is the way in which responsive implementation enhances the value of the advice offering through better investment outcomes and by meeting the client’s expectations for active and timely management of their investments. This is where financial advice businesses can build a strong value proposition.
Meeting clients’ expectations in today’s advice world means meeting three criteria: responding market developments quickly, providing contemporary multi-asset portfolios, and actively managing and monitoring the client’s investment. In order to achieve this, advisers are increasingly turning to professional managed portfolio managers and SMA providers, outsourcing day-to-day portfolio management to an experienced team of investment consultants and focusing on providing holistic, goals-based advice.
By using Lonsec’s managed portfolios and SMA’s, advisers can access contemporary, actively managed multi-asset portfolios with dynamic asset allocation and active investment selection, backed by an investment committee comprising our senior investment consultants, research sector leads, and external economists.
This means investment solutions are backed by a highly qualified, well-resourced, and experienced group of investment professionals. They can also ensure their clients receive responsive and efficient implementation of investment decisions, avoiding delays that can eat into investment performance while winning back time to build enduring client relationships with an appropriate level of service.
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