FoFA solutions bring additional benefits to non-aligned financial advice firms

Alex Wise

With the Future of Financial Advice (FoFA) kick-off date of 1 July looming, specialist investment management group Select Asset Management Limited (Select) has urged Australian financial advice firms to have a hard look at underlying investment structures used to manage client portfolios.

“A prevailing sentiment is that FoFA has been a hard slog, with little business upside for planners beyond the implementation date,” said Select Fund Services Head Alex Wise.

“But our experience with a number of financial advice firms is that FoFA has provided a catalyst for positive benefits, beginning with managing the key issues of business risk,” he said.

Mr Wise said that while many financial advice firms are still wrestling with conflicted remuneration and the best interest tests introduced by FoFA, others are seeing operational efficiencies and investment benefits deriving from their solutions.

“Financial advice firms that have found solutions to their FoFA compliance issues are also discovering significant efficiencies and FoFA compliance benefits in operating multi-asset portfolios through regulated unit trust schemes,” he said.

“On the investment side, customised portfolios in a fund structure provide unlimited access to diverse Australian and global investment managers and can invest globally incorporating risk reduction techniques such as foreign currency hedging very efficiently. These unique portfolio construction characteristics have proven beneficial in current markets.”

“Additionally, structuring customised portfolios in this manner has increasing relevance in meeting the best interest test and avoiding the conflicted remuneration obligations under FoFA.”

Recent examples include portfolios operated by Select Fund Services investing in offshore structures that effectively provide insurance in the event of market volatility.

“Select has provided funds with tail-risk hedging that is not easily available through wrap or MDA accounts. One example would be a Japanese focused fund that has provided significant out-performance as Japanese government bond yields have spiked.” said Mr Wise.

Mr Wise said the use of such an approach builds a robust underpinning in the core operational areas of risk, secure custodial arrangements and professionally managed portfolio construction services.

Select Fund Services provides responsible entity (RE) services to numerous dealer group clients. This service enables licensees to focus on investment management and advice – giving Select Fund Services the job of compliance, governance and fund administration.

“Select Fund Services operates 20 funds as RE and trustee for multiple clients. Our systems and processes are tailored to provide fiduciary oversight to multi-asset portfolios.”

In addition to pure governance and compliance functions, Select Fund Services also delivers services to multi-asset unit trust structures. “Select has significant experience in drafting product disclosure statements for these types of portfolios and can also provide expertise to assist with important marketing documents.” said Mr Wise.

Multi-asset managers using a unitised registered scheme also gain the benefit of investor protection mechanisms such as an independent custodian and auditor. “Select has hand-picked tier 1 providers such as Ernst & Young for audit, Baker McKenzie for legal advice and BNP Paribas for the custodial function. This completes a fully institutional offering for our customised portfolio clients”.

Additionally, non-aligned dealer groups and planners have also found a significant operational burden in rebalancing fund investments ‘off-wrap’. This particular challenge has been met by Select Fund Services to engineer an easy outcome.

ASIC’s recent consultation paper on risk management CP204 indicates higher regulatory oversight for the way RE’s address business risk. Coupled with increased scrutiny of MDA operators and their capital adequacy, this has made it difficult for some firms to establish schemes internally.

“From a compliance perspective we also run significant risk management overlays, this clearly being the way ASIC would like RE’s to go and we are ahead of the curve on this,” Mr Wise said.