HUB24 has quantified the benefits managed portfolios can deliver for investors by minimising delays in implementing portfolio manager changes.
In HUB24’s latest Platform Series ‘Measuring the Cost of Delay’, it outlines a scenario where a client who invested $500,000 in a diversified growth managed portfolio over a period of six months was $4,460 better off when portfolio manager decisions were implemented immediately compared to if they were invested outside of the managed portfolio structure where there was a delay in implementation of even one week.[1]
Over time, the benefits of timely implementation were reduced further, and by week six, $6,380 or 60.1% of the gain was lost through implementation delay.
Increased compliance and the manual nature of traditional portfolio management processes has made it challenging for advisers to deliver timely implementation of investment decisions. Advisers can often take one to six weeks to implement the decisions across their client base due to challenges in preparing advice documentation, discussing changes with clients, obtaining client consents and lodging paperwork.
Milliman Principal Victor Huang who provided the analysis for the scenarios commented, “Delaying asset changes by just a couple of weeks can really have a material impact on your client’s outcomes and quite possibly negate a large part of what the portfolio managers are trying to achieve when making these decisions.”
In another scenario, HUB24 illustrated the impact on client portfolio value where portfolios are rebalanced typically twice a year to coincide with biannual client reviews (‘static rebalancing’), with ‘dynamic rebalancing’ where rebalancing is implemented whenever the asset allocation weighting moves 2% outside the initial strategic asset allocation range.
Using a $500,000 investment portfolio with a 70/30 growth-based asset allocation, the scenario illustrated that using dynamic rebalancing, where six rebalances were executed (compared to two under static rebalancing), resulted in a benefit of $3,531 for the client in 2020.[2]
This result was further increased over five years between 2016 and 2020 where analysis showed the portfolio was enhanced by $8,335 compared to the portfolio that used static rebalancing, representing an additional return of 1.67% on the initial portfolio of $500,000.
According to HUB24’s Head of Managed Portfolios Brett Mennie, advisers are looking for more efficient ways to approach portfolio implementation, to access professional investment expertise at scale and to tailor portfolios to meet individual client needs to add value to clients.
“Although we have seen enhanced market volatility recently and these results won’t always be the case, these scenarios illustrate that empowering portfolio managers with innovative managed portfolio capability to make changes to client accounts in real time may lead to a better outcome for clients compared to simply reviewing the portfolio twice a year, once again highlighting the benefit of managed portfolios over traditional portfolio management processes,” said Mr Mennie.
Townsend Cobain Partner and Private Wealth Adviser Tim Townsend agreed, saying the client consent model has its limitations. “There was a constant feeling of potentially leaving clients behind on the battlefield. We needed a solution to be able to act decisively, quickly and effectively across all of our clients.”
HUB24’s commitment to delivering innovative managed portfolio capability for advisers and their clients has consolidated their position as the market leader, maintaining 1st place for Platform Managed Accounts functionality for the 5th year running.[3]
Scenario 1 – The cost of delayed asset allocation changes
Using the live portfolio performance of a $500,000 diversified managed portfolio on the HUB24 platform invested for a six month period, HUB24 compared the potential cost of delaying asset changes by 1, 2, 4 or 6 weeks, to illustrate the real world experience of how long it might take an adviser to administer a portfolio change.
This scenario illustrated delays in implementing the asset allocation change reduced the switch advantage – in particular more than 42% of the gain of implementing an asset allocation change was lost through an implementation delay of one week.[2] This loss was increased by more than 60% through an implementation delay of six weeks.
Scenario two – The cost of delayed portfolio rebalances
Here the cost of delayed portfolio rebalances were analysed by comparing dynamic rebalancing to a static approach to portfolio implementation. Using a $500,000 investment portfolio with a 70/30 growth-based asset allocation, it illustrated the portfolio that used dynamic portfolio changes (rebalancing six times in a year) resulted in a one-year outperformance of $3531 in 2020 compared to the portfolio that did not.
Over three years between 2018 to 2021, the scenario illustrated the portfolio which used the dynamic rebalancing did so 11 times compared to six times under static rebalancing, and lead to a $6,144 investment performance benefit representing an additional total return of 1.23% of the initial portfolio balance.
Over five years, the scenario illustrated that the portfolio which used the dynamic rebalancing resulted in it being enhanced by $8,335 when compared to the portfolio that used static rebalancing, representing an additional return of 1.67% on the initial portfolio of $500,000.
Further to this five year analysis we tested outcomes based on 20 one-year timeframes (2001 to 2020) and observed that the dynamic approach (based on the same parameters) achieved more favourable results 70% of the time (representing 14 of the 20 one-year timeframes).
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