The search for the ultimate ‘system’ of efficient portfolio construction and ongoing management has led to some interesting innovations. Here, Select Asset Management’s Alex Wise looks at the evolution of the underlying product structure with an eye to the top-line investor benefit.

Efficiencies in portfolio management have long been a goal of savvy investors and their financial adviser. But today we are shackled with the onerous task of reporting compliance, Dreaded paperwork. The process of completing a Statement of Advice (SoA) for material changes or a Record of Advice (RoA) for minor changes each time a change in investment is required is a tedious and intensive process for all concerned.  Moreover, client investments may be put at risk when markets begin to gyrate. Advisers may not produce timely, written advice to be acted upon quickly enough in order to protect clients. Similarly, clients are often unable to take advantage of short-term mispricing opportunities.

Solution? Two investment structure approaches have evolved to provide a more responsive investment solution for clients. They are, firstly, the use of a multi-asset unit trust as a core portfolio tool and, secondly, the use of managed discretionary accounts (MDAs), while an increasing number of advisers are considering a hybrid solution as the best of both worlds.

Managed Discretionary Accounts

MDAs are provided by a financial planning, fund management or brokerage house – each working as an MDA operator (“Operator”).  Typically an Operator manages a portfolio of equities for a client on an individual or model basis, although solutions exist encompassing other non-equity assets.  A client gives the Operator discretionary authority to make and implement investment decisions on his or her behalf. Importantly, client approval is not required for each investment decision.  This also means that reporting requirements to clients can be simplified and the Financial Planner is not required to  to engage the client in advance each time an investment decision is made.

Certain MDAs can be tailored specifically to the requirements of each individual client. Bespoke MDAs, called individually managed accounts (IMA), require higher minimum investment amounts in order to be practical. More commonly the MDA operator will apply the same investment decisions to multiple client accounts according to a model portfolio i.e. a separately managed account (SMA). Importantly, from a legal perspective, the client holds a direct legal or beneficial interest in the underlying assets within the MDA. This is distinct from managed investment schemes where the underlying assets are held by a unit trust, and the client has a direct interest (a unit) in that trust.

For clients with larger balances, the MDA offers increased control, however, the expense associated with operating an MDA have made it impractical and commercially challenging for small to mid-size clients to get the benefits of a tailored MDA.  Clients with larger sums to invest are able to take more or less risk depending on their appetite or investment preferences – for example, financial securities could be excluded from a bespoke MDA account; perhaps not a bad thing given current valuations!

Some MDAs can offer portfolio protection via derivatives or options strategies.  However, these protections are not available to all clients as they depend on the Operator’s regulatory status and whether they can transact derivatives on behalf of their clients.  Many fund managers and financial planners acting as MDA operators don’t have the necessary licence to use derivatives or options.  This can leave clients exposed without portfolio protection in times of market volatility.  However, for those clients that benefit from an Operator with derivatives experience, market protection strategies can insulate portfolio returns from severe downturns in market values. All with the attendant risks, of course!

Importantly, the tax impacts of investment decisions remain specific to each client.  This means that the Operator ensures that the client’s tax consequences are insulated against the impact of other investors.  Unit trusts offer a similar outcome for all clients.

It is worth noting that many Operators have a lack of experience outside of equity securities.  This can leave clients facing low or non existent access to  bond and other markets (as well as derivatives outlined above).

One further criticism of MDAs is that they usually do not allow access to global investment markets and outcomes.  Whilst many investors are satisfied having 100% of their investment outcome linked to the ASX, many others are now seeking exposure to fixed income or Term Deposits. Global equity markets – including established markets like the US – or more exotic emerging market locations may be in favour.

Additionally, incentives for MDA operators have also been called into question by some observers.  The use of brokerage commission as a remuneration tool has been linked with an incentive to churn the portfolio, meaning that clients will participate in more trades to generate higher commission for the Operator or their affiliate.

Detractors of the MDA model also point to the lack of accessible performance data.  Unlike unit trusts which have audited track records, the performance of MDA operators on a risk-adjusted basis is less clear.

The universe of fund managers operating MDAs is relatively small except in the case of Australian Equity managers.

Many skilled fund managers generating market outperformance or alpha can be difficult or impossible to access via an MDA, particularly the universe of high quality offshore managers. As such, MDAs can also offer access into unit trusts to access these high quality managers. However, even access to these managers via a unit trust can be fraught with difficulty as many highly skilled managers have high entry levels precluding MDAs from rebalancing into these managers.

For the Financial Planning business considering operating an MDA the costs can be high. Australia’s regulatory authority, ASIC, is considering implementing higher minimum capital requirements for MDA operators which may deter many prospective Operators from offering MDA solutions.  Many Operators also suffer from internal costs associated with reporting. Clients who require customised portfolio reporting creates a business drag on the desired scale efficiencies in reporting, including performance and portfolio reporting. 

Multi-Asset Unit Trust

Many financial planners are also utilising or considering the use of a multi-asset unit trust to act as a core portfolio.  Like an MDA, the discretion to make investments is vested with an investment manager which can be the financial planning group or a third party manager.  This obviates the need to make ROAs and SOAs every time a change in investment is required.

The unit trust would then make investments into third party fund managers or direct assets that can be based in Australia or offshore. Groups that utilise the unit trust solution enjoy the ability to access any investment fund anywhere in the world.

Whilst this approach requires research, many unit trust sponsors will utilise an asset consultant or third party manager to implement research on these funds.

Endowment ‘likes’

Access to the global talent pool is important for investors who seek to diversify their returns from solely Australian equities or fixed income.  Many sophisticated investors are now looking for “endowment like” portfolios that deliver long term returns. These investors view the ASX as being increasingly volatile and the access to unique investment strategies offshore can reduce overall portfolio volatility over time.

Access to market protection is also a key selling point of a unit trust with a unit trust operator being able to hedge foreign exchange, interest rate and market exposure.  These traits are important for those seeking endowment like characteristics.

Responsible entities of unit trusts are subject to rigorous supervision from the ASIC.  Supervision visits and high regulatory capital requirements mean that responsible entities operating a unit trust are subject to higher regulatory standards than MDA operators.

Unit trust structures do come at a price however, and the fixed costs of operating a unit trust can preclude access from smaller groups with small amounts of funds under management.  Whilst providers such as Custodians and Auditors offer protection to investors, they charge additional costs which are typically recharged to unit holders.  Moreover, any third party responsible entities or asset consultants will need to receive fees for their services.

Additionally, ownership of the underlying assets is co-mingled and clients hold units in a trust rather than the underlying investments.  As such investors are subject to the redemption rules of the unit trust rather than having the ability to sell investments directly into the market.

Summary

Whilst MDAs and Unit Trusts deliver significant efficiencies to clients and advisers, both also bring  pros and cons which should be understood prior to embarking on either strategy.  The ability to access a global investment talent pool through a unit trust is tempered by the lack of direct ownership of investments and additional costs.

The MDA often lacks ability to enact portfolio protection from violent swings in foreign exchange rate, interest rate or market movements.  Additionally, the limited pool for accessing investment ideas through an MDA can be off-putting for some clients.  Many financial planning groups are proposing solutions that include a unit trust for a core portfolio but on an MDA platform for satellite investments so that benefits of both can be realised.

Note: The accreditation for this CPD article is no longer current. Please visit our CPD section for current CPD quizzes. 

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Accountants ok with platforms as tools for managing SMSFs.

A growing number of accountants believe investment platforms are appropriate transaction, administration and reporting tools for their self managed super fund (SMSF) clients, the OneVue/Investment Trends 20113 SMSF Accountant Report has revealed.

OneVue head of partner solutions Brett Marsh said according to the study, while accountants estimate that only 18 per cent of their clients use investment platforms, a much larger 59 per cent of accountants surveyed said that investment platforms are an appropriate online facility to manage SMSF client portfolios.

“Accountants told us that 54 per cent of recent SMSF client investments were made through an investment platform despite that only one in five clients are using an investment platform currently,” he said.

“The most common reasons accountants said platforms were appropriate for SMSSFs were consolidated reporting, access too wholesale funds and wholesale rates, as well as easier administration and tracking of investments.

“Meanwhile, the common drivers for nominating a platform as the most suitable facility for SMSF clients were good reporting, good administration, easy too manage, familiarity with the platform they use and a comprehensive investment menu.”

Marsh said high costs were universally seen as the major barrier for SMSFs using investment platforms.

“A number of platforms have been cutting fees in recent times and more are placing greater attention on offering new efficiencies for t hose advisers and accountants who work alongside each other in catering to the SMSF sector,” he said.

“I think the newer platform entrants are really paving the way for further innovation to support accountant and adviser partnerships, particularly as they are not hamstrung by legacy systems which can sometimes be very costly to change.

“The smaller independents are boosting competition and helping modernise the industry through things like more extensive investment menus which give greater choice to accountants and advisers which is particularly important inn a post FoFA world where the client’s best interests are top off mind.”

Marsh added that the $505 billion SMSF industry in Australia continues to grow and online investment platforms that can make things more streamlined and transparent for clients can only be beneficial.

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Aassets under custody for Australian investors grew in 2013.

The Australian Custodial Services Association (ACSA)  released its half yearly industry statistics showing continued growth in Australia’s custodian and administration sector.

The latest research from ACSA – the peak industry body for Australia’s custody and asset administration sector – revealed total assets under custody for Australian investors grew by 6.7% to $2.16 trillion for the first half of the year to 30 June 2013.

Every major player in the custody market saw an increase in Assets under Custody during the six months, largely driven by a rising global and local market.

Helped by the falling Australian dollar and rising global equity markets, the period also saw continued strong growth for non-Australian assets under custody for Australian investors (up 10.2% to just over $600 billion); with Australian Assets under custody for Australian investors also rising strongly (up 5.5% to $1.56 trillion).

Australian Assets under Custody for foreign clients (sub custody) rose only 0.1%; reflecting slowing foreign appetite for Australian assets as the commodity boom slowed and interest rates were cut to historic lows.

Published biannually, the industry statistics show the size of assets under custody and administration in Australia – largely reflecting Australia’s growing superannuation and institutional investment base. As well as providing insights into settlement transaction volumes, the statistics are a league table of major custody, sub-custody and asset administers in Australia, recording major mandate wins and losses.

A closer look at the numbers

Local player NAB Asset Servicing retained its position as the largest overall player with $556 billion in total assets under custody for Australian investors (up 2.2% for the six months), followed by J.P. Morgan ($394 billion, up 5%) and BNP Paribas ($313 billion, up 5.7%).

Citigroup recorded a 21% increase in total assets under custody to $213 billion, reaching 10% market share

The other big mover over the past six months was Bond Street, with asset growth up 31% to $63.7 billion.

Total local assets held under custody increased by 5.5% over the past six months with NAB Asset Servicing, BNP Paribas and J.P. Morgan the leading holders of Australian assets under custody.

J.P. Morgan remains the largest custodian of non-Australian assets for Australian investors ($137 billion, up 25.8%), followed by State Street ($87 billion, up 2.8%) and Nab Asset Servicing ($86 billion, up 15.8%).

HSBC Bank remains the dominant sub-custodian in Australia with $576 billion in sub-custody assets.

Assets held under administration (not held in custody but administered by custodians) were up 14.5% to $245 billion. BNP Paribas took top spot as the largest administrator in Australia with $407 billion in assets under administration, followed by NAB Asset Servicing ($369 billion) and State Street ($208 billion).

Click here for a copy of the latest ACSA custody industry statistics.

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The research from ACSA – the peak industry body for Australia’s custody and asset administration sector – showed stronger growth in non-Australian assets under custody (14.5%) compared to Australian assets under custody (6.7%) for Australian investors. 

Australian assets under custody for foreign investors (sub-custody) also grew by 13.5% indicating a strong rebound in local markets and global demand for custody and administration services.

Published biannually, the industry statistics show the size of assets under custody and administration in Australia – largely reflecting Australia’s growing superannuation and institutional investment base. As well as providing insights into settlement transaction volumes, the statistics are a league table of major custody, sub-custody and asset administers in Australia, recording major mandate wins and losses. 

Mr Pierre Jond, Chair of ACSA, said players in the custody and asset administration space were seeing renewed confidence from their institutional clients such as asset managers, insurance groups and superannuation funds. 

“The latest ACSA statistics show positive broader market sentiment and strong growth across the board in the custody and administration community,” Mr Jond said. “The current data and industry feeling is that we will see sustained growth in 2013 rather than a temporary rebound,” he said.
 
Key players 

Local player NAB Asset Servicing remains the largest overall player in the custody market with $554 billion in total assets under custody for Australian investors (up 1.0% for the six months), followed by J.P. Morgan ($376 billion, up 11.8%), BNP Paribas ($296 billion, down 6.6%). Both Citigroup ($177 billion) and State Street ($171 billion) saw significant growth of their total assets under custody of 40.5% and 56.1%, driven by operational insourcing and client acquisitions.

Total local assets held under custody increased by 6.7% over the past six months with NAB Asset Servicing, J.P. Morgan and BNP Paribas the leading holders of Australian assets under custody. 
J.P. Morgan remains the largest custodian of non-Australian assets for Australian investors ($109 billion, up 13.6%), followed by Northern Trust ($86 billion, up 7.0%) and State Street ($85 billion, up 150.3%). 
 
HSBC Bank remains the dominant sub-custodian in Australia with $571 billion in sub-custody assets. 
 
Assets held under administration (not held in custody but administered by custodians) were down 10.5%, as low cash rates drive investors to move cash and fixed income assets into equity markets. NAB Asset Servicing remains the largest administrator in Australia with $379 billion in assets under administration, followed by BNP Paribas ($357 billion) and State Street ($182 billion).

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“This is an important appointment for us, with the role covering the development and delivery of key financial planner services to all our Advice businesses:  BankSA, Bank of Melbourne, Magnitude, Securitor, St.George and Westpac,” Mr Spiers said.

Wes is a financial services and wealth management specialist with experience spanning advice, product and platform development as well as wealth management administration. He has deep experience garnered over the past 15 years working across four continents.

Wes joins BT Financial Group from Bravura Solutions, where he has worked for the past five years, his most recent role being Head of Operations – Australia and Asia. He has also held senior roles at AMP in Corporate Strategy and Product Development.  And earlier in his career Wes worked in a number of paraplanning, financial planning and technical advice roles.

Wes’ appointment is part of BT Financial Group’s continued commitment to developing market leading capabilities for planners that ensure they have access to the best support and tools enabling them to service their clients to the highest standards in the industry.

“Practice management is the lifeblood of the services that underpin the high quality advice that our planners bring to their clients,” Mr Spiers said.

Of his new role, Wes says, “I’m extremely excited by this opportunity as what we do drives to the heart of what financial planners rely on to provide quality strategic advice to clients – and that is what this industry is all about.”

Wes is responsible for:

• Dealer services for bank channel and dealer group planners
• Technical support & services
• Para-planning and advice documentation
• Research and investment strategy
• Practice & professional development

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Prime Super, Australia’s only national super fund for rural and regional Australia, has agreed in principle to appoint global financial services firm Russell Investments to deliver administrative services to the fund’s 150,000 members, transferring from current provider Pillar Administration.

The new partnership, proposed to begin on 1 January 2012, will allow Prime Super to further strengthen its member and employer services with the addition of some new features.

The new initiatives include intra-fund financial planning for members wanting to discuss investment strategies, insurance, and contribution strategies, ATM access for Prime Super’s pension product and a strong member education program.

Lachlan Baird, CEO of Prime Super, said that while Pillar had provided good service and support to the fund over their eight year partnership, the additional services offered by Russell, and their technological edge, were necessary to help grow the fund.

“The decision to change administrators was not an easy one and we have undertaken a highly competitive and detailed tender process. We’ve also had a good relationship with Pillar over the life of the contract.

“Given our significant growth agenda we felt Russell’s leading edge administration model was best suited to help us achieve our goals,” Baird said.
Mark Blair, Russell’s Managing Director, Industry and Government Funds, said Russell was committed to help Prime Super drive further growth and develop more and targeted member-orientated solutions.

“We developed our administration model so that it can be tailored to the specific requirements of Australia’s largest superannuation funds”, Blair said. “We look forward to working in partnership with Prime Super to meet the individual needs of the Fund and its members.”

Driving growth and efficiencies through innovation

Baird indicated that Russell’s technology package will enhance the operations of the fund and enable Prime Super to significantly improve its online service offering to members and employers.

Russell’s data reporting capabilities were also viewed as a strength and will enable Prime Super more efficient access to fund data and assist with the decision making process for business development opportunities.

“Russell has provided us with a highly consultative approach from the outset. We have been impressed with their strong focus on member needs and innovative solutions.

“A transition plan is now in progress to formalise Prime Super’s in principle decision and we will be working closely with Pillar and Russell to ensure that members and employers have as few interruptions to service as possible during the changeover.” Baird concluded.

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Aviva’s Head of Retail, Andrew Peterson, said IRESS’ SMA technology provides a leading-edge and completely configurable administration system which allows Aviva to distribute its products independently of the traditional unit trust and platform environment.

“IRESS has helped us mark the dawn of a new era in SMAs by providing the technology that opens up access to the wholesale market for retail investors, via their professional advisers,” Mr Peterson said. “That means we deliver improved investor access to wholesale fee and brokerage rates and institutional placements.”

IRESS managing director, Andrew Walsh, said the brief for IRESS was to leverage the long-standing relationship with Aviva’s institutional portfolio management process to allow Aviva to offer a retail SMA that helps advisers deliver more efficient and more cost-effective advice to their clients.

“The IRESS Portfolio System leads the way in fusing institutional portfolio management with today’s retail demands as evidenced in this delivery to Aviva,” Mr Walsh said.

The IRESS Portfolio System (IPS) allows Aviva to deliver investment management in a SMA format offering beneficial ownership, transparency and portability, while remaining institutionally robust. It also provides out-of-the-box data feed distribution to all relevant advice technologies such as XPLAN, VisiPlan and Coin.

“In the interests of their clients, advisers are, sensibly, demanding rich data, something that is often overlooked by many SMA offerings,” Mr Walsh said. “As a leading independent technology provider to the financial services industry, we are committed to meeting the demands of the market and making technology work harder and faster for all advice participants so that they can deliver quality advice to clients.”

Direct SMA is only available to investors via authorised financial advisers.

Further information available at www.avivainvestors.com.au/directsma

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Global financial services firm Russell Investments announced it is set up to aggressively compete for new administration business.

In May 2010 Russell announced that it would transform its Australian Member Administration Centre – currently outsourced in part to IBM – by bringing in-house more than 70 roles critical to super fund clients and members. The centre would be supported by a leading offshore service provider for back-office transactional functions.

Russell’s Managing Director for Australia and New Zealand, Chris Corneil, today announced that it is on track with the implementation of the new administration model having recently secured critical roles in its administration team and appointed the back-office provider. The model is set to enhance member services and drive efficiencies in super administration by way of a competitive offering leveraging back office functions through Russell’s existing global offshore capability.

Focused on member service and engagement

Russell firmly believes that the quality of engagement with the individual is a critical success factor in superannuation, particularly in the post-Cooper environment. The new model is all about member service delivery and meaningful interactions with members.

“We believe that all members should have access to financial advice through superannuation. Our new model will introduce intra -fund advice as a key component of Russell’s member engagement strategy. Intra-fund advice will allow Russell to reach fund members on a personal level during relevant trigger points and make a difference by helping members make informed, confident financial decisions,” Corneil said.

Russell is appointing staff and integrating new technology to deliver intra-fund advice through its new Advice Centre – an enhanced advice offer through the new model.

Driving efficiencies

The new model will set the benchmark in administration service delivery standards as the firm will drive efficiencies through streamlined platforms and place the fund member at the forefront of all activities. Andrew Doman, Russell’s Global CEO, said the firm is on track with implementation plans of the new model that will position Russell as a leading provider of super administration.

“We are committed to raising the bar for best practice in superannuation administration and member services. By striving to find the most efficient ways of operating, we are bringing new solutions to market and scaling our operations to take on new business opportunities.” said Doman.

In addition, Russell will also partner with other specialist providers to handle high volume transactional operations like inbound mail through document imaging and outbound mail with the aim of moving toward a paperless office.

“What makes this model so effective is that Russell will have direct control and ownership over all member contact points. We want to own this space, as our goal is to innovate and be the best in the industry in member engagement,” Corneil concluded.

Securing the right team

A critical milestone in the transition process is having the right people on board. More than 70 staff from IBM SuperLife have signed employment contracts with Russell Investments and will join the team on 1 January 2011, when the new model is launched. That team will complement the skills of the 25 individuals working in Russell’s existing superannuation business.

Corneil said, “Having the team of 70 experienced administration professionals come across was a high priority for Russell and will underpin the success of the new administration model.

Members want to speak to people who are knowledgeable, understand their issues and are based in Australia. We are in the process of making other strategic hires to complement our service delivery model.”

Russell currently provides administration and member services for approximately 220,000 individual Australian super fund members via its SuperSolution Mastertrust and on behalf of some of Australia’s largest super funds.

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