We need to think hard about the latest industry trend for advisers to create and manage or package their own managed accounts. It’s a natural direction due to technology advancements and it offers reduced paperwork on what might be termed hygiene compliance issues such as RoAs and so on.
But it categorically lifts governance risk and it’s a delicate consideration in the vertical integration debate. If we get it wrong, we are in deep trouble.
We need clarity on whether advisers are wealth managers or strategy advisers focussed on life goal outcomes. It’s a fascinating debate because both are valid, both add value to clients lives but both offer different routes in the destiny to the advice profession.
The elephant in the room, for those in doubt, is whether advisers offering their own managed accounts do so for the asset management clip or for operational efficiency and better client outcomes.
This is a big discussion but let’s remember it’s not necessarily a binary outcome as both can be achieved. Frankly, there aren’t many topics that polarise commentary like this in the wealth industry and we need to be mindful of all the points as there are some very hostile views from the cynics against in house managed accounts.
Looking forward it will need some intelligent discussion because while being a very valid strategy and legal, it will inevitably bring disrepute to the advice industry if and when an advice practice fails… and without doubt this will happen.
When it does, the question of self-interest will be raised again and therein lies the festering wound in advice. We simply have to get beyond this question being needed.
From afar, my suspicion is that the typical discussion on this subject focuses on the wrong issue – whether the adviser is capable with a strong investment committee to match a more dedicated outsourced arrangement.
The real debate is legal and lies in the process of discharging advice. It’s more around meeting the Corps Act and demonstrating the client best interest test has been met – and as we know that’s not all about investments.
Avid watchers of the Royal Commission cross-examination of Sam Henderson about the use of the Henderson Maxwell managed account offered us some useful insight to the clarity of the debate, and in the hands of a legal expert it didn’t focus on investments.
The critical question, quite disarming in its simplicity was: “Did you review alternative options to your own solutions and provide evidence of why they were not suitable?”
As we know, this is unlikely to be met in all circumstances and yet all clients received the same recommendation. Game set and match, and yet for all we know the managed account may have been brilliant.
The above illustrates a bit of the challenge about to be unveiled and it would be natural to assume the regulator will be reviewing the IFA market for vertical integration conflicts like this once things settle down post RC.
We need to be sure this issue is handled well, otherwise consumers will be hearing more about adviser self-interest through this medium when, in truth, it’s not necessarily all about that.
In fact, more and more managed accounts are being structured with no fee gain to the adviser – that is, no clip other than cost recovery. This is a fascinating moral step because it implies the structure has been created for scale benefits and operational efficiency in the advice process where the client is the sole beneficiary.
However, commercially it can be argued there’s no point in doing all this because the practice is just spending time on investment management when it’s not a value add in the advice relationship. That’s another worthy debate for on this subject for practice management professionals.
In summary, we know managed accounts are in full swing and represent the future. So the choice has never been starker for the advice fraternity: outsource to independent experts or manage in house.
We know both have the capacity to work well but we also know one brings community risk to the profession. It’s the old world vs the new world with the new world logo of client first. Let the debate begin.
First published: 27 June 2018
Ian Knox is the chairman of Paragem Pty Ltd. The views expressed are his own.