Consumer trust isn’t something to be taken for granted, but reports from the UK, US and here at home are all pointing towards an uplift in trust levels around financial advice, which can only be a welcome development.
There are significant tailwinds behind the financial advice industry at the moment, but some major obstacles are still preventing advice practices from taking advantage of surging demand according to a new study from CFS.
Innovation in practice: Thematic investing and managed accounts
For wealth management practices, portfolio design is not just a key part of the decision-making process – it’s also a way to differentiate a company’s value proposition. Two approaches – thematic investing and managed accounts – illustrate how an adaptive practice can hone its offering to meet client needs.
Speaking at The Inside Network’s Investment Leaders Forum in Noosa earlier this month, Global X head of institutional sales Chad Hitzeman (pictured, left) and Mason Stevens CIO Jacqueline Fernley (pictured, right) discussed the responsibilities chief investment officers and other allocators must balance when designing, implementing and supporting portfolios.
To provide a value proposition that stands apart from others, Hitzeman and Fernley said, CIOs need to be adaptive and consider both the range of available investment products and how they can complement each other.
According to Hitzeman, product innovation is key to an adaptive wealth management practice. He spoke about thematic investing “having, at a very high level, a specificity of focus on certain equity universes, industries and companies”.
Thematic portfolios, he explained, are not constrained by sector or geography and are instead centred around a structural tailwind – “something of a megatrend”.
“In other words, thematic investing is about covering areas that should have adoption curves and deep potential”, underpinned by a large addressable market.
However, selection remains an important element. “Even if there is a megatrend and you’re quite convicted on it, that doesn’t necessarily mean you’re going to select the right stocks to thrive alongside the theme,” Hitzeman said, pointing to the dot-com era as an example.
“The internet is still with us today, but many of those early companies are not.”
One requirement for a thematic investing approach is to have high conviction, Hitzeman said. Also important are having a liquid pool of stocks to operationalise a portfolio over and having a timeframe of five years or more to fully capture the theme’s development.
“We’re talking about very interesting areas, but it should all come back to the fundamentals and risk profiling,” he said, adding that diversification is key. “It’s not as though you’re introducing the theme in isolation – it ought to be introduced into an asset mix so that it’s always balanced against other asset exposures.”
Active or passive?
How investors access thematic investing is the next frontier of decision-making, with both active and passive presenting both advantages and disadvantages.
Passive investing via ETFs is cheaper, more liquid and is replete with an increasingly wide array of product choices, but is less discriminate than active funds. Active is more tailored, but has historically underperformed the benchmark, is less liquid and has higher barriers for entry on the consumer side.
On an earlier session, Platinum Asset Management co-chief investment officer and chief executive officer Andrew Clifford noted that while passive has performed well in the last decade or so, that may not always be the case.
“There’s still very much an opportunity for active managers to really make a difference here,” he said, noting that a relatively homogenous group of stocks internationally (technology) and domestically (banks, miners) have kept passive in front, which is pushing valuations in those stocks beyond their true worth.
“It has resulted in a crowding in a certain type of stock where… we pay ever-higher prices for that certainty,” he said. “But I think that ultimately, the huge difference in performance and valuations that we see in markets is just more and more setting up the opportunity for active managers to show what they have to offer.”
Focus on the ‘why’
Fernley described how she often hears from practitioners seeking to move from being a traditional wealth practice managing client capital on a one-by-one basis to offering a suite of managed accounts. “It’s a big trend, and it’s not going away quickly,” she said
“The rise and rise of managed accounts is a well-trodden path now, but we’re still in the infancy of the sector,” she said, pointing to expectations of 20 per cent growth over the next decade in the sector.
For any practice considering moving to a managed-account solution, she said, success can hinge on avoiding major problems by doing the work up-front.
There are five steps for a wealth management practice to follow in creating managed accounts, beginning with setting its customer value proposition, Fernley explained. Then, the practice must craft its investment philosophy, appoint an investment committee and design a governance scheme.
“Then, and only then, do you deliver your suite of models,” she said. “Too often, I see wealth practices getting to the end before going through the pain points and the hard part up front.”
Understanding a wealth practice’s growth strategy and securing up-front stakeholder engagement are also important.
“It comes down to where you are in your wealth practice and how you want to grow – the ‘why’ of why you’re heading towards a managed-account solution,” Fernley said. “Anchoring to that ‘why’ will help inform key decisions you make throughout the journey.”
