Whether it be advisers making the step change from model portfolios to managed accounts or groups that are looking to build institutional-grade portfolios, outsourcing some or all of the investment function requires stringent systems, policies and processes to manage risk and monitor performance against client objectives. In this article we discuss how to establish a best practice investment governance framework and where to get support and expert help.
Some advisers may acknowledge they are not investment experts, and they are better off spending their time, energy and resources truly getting to know their clients and grow their business. According to the Investment Trends Managed Account Report 20211, more than 40% of financial advisers in Australia use managed accounts, an increase of 22% in the last five years.
Managed accounts delegate day-to-day investment decisions and the implementation of investment strategy to professional investment managers. The ability to offer clients an investment solution that reflects a specific investment philosophy, is often a key driver for an advice practice to consider managed accounts. But to truly realise the benefits of managed accounts, a robust investment governance framework is key.
It can be tempting to get straight down to solution mode. However, understanding your own drivers and objectives can be the difference between having a clear sighted and resource efficient approach versus an unwieldy and time-consuming process. Some core questions to ask – and answer – include:
In many cases the answer will be a combination of all of the above so you will need to prioritise which of these is most important. Managed Accounts come in many different forms and structures. And quite often, advisers will adopt multiple solutions to cater for differing client segments within their practice.
There is no ‘one size fits all’ when it comes to investment governance. The specific processes and people you put in place will depend on a number of factors specific to your business. However, there are elements that are critical to any best practice framework.
Your investment philosophy serves as a guiding light when it comes to making portfolio decisions. Whether you are developing an investment philosophy for the first time, or consolidating existing thinking, consensus is key.
It’s critical for all advisers to believe in the approach they are recommending. It is therefore important advisers have “buy-in” when the investment philosophy is created. This is the time to seek feedback and discuss key questions in detail. For example, do you want to use active and passive strategies? Do you believe in timing markets by taking tactical tilts? Should ESG be integrated into the investment process? Do alternative investments have a role to play?
Just as important, is the investment approach, including whether you want to use an internal team with suitable capabilities or whether you will use an external provider. Either way, you need to be able to answer questions such as what research will you use? How will investment decisions be made? Who can bring investment recommendations to the table? And who has the final say on whether an investment makes it into a portfolio?
Once you’re clear on your overarching investment philosophy and approach, next is the detail around how you’re going to maintain a disciplined investment process, Defining how your practice will undertake its investment due diligence and asset allocation is going to be key here.
As a starting point, a good question to ask is what skill sets you need in an investment committee and what are your current resources? Ask yourself where you add value to a client and where you need specialist input. Roles you may consider outsourcing include an asset consultant, investment management specialist and risk management functions.
In terms of the day-to-day management of investments, again it’s a question of where your skills lie and the internal resources you want to dedicate. Having documented processes will support both efficiency and risk management. For example, how frequently can trades be made, what time of day and are they using a trading algorithm or direct market access (DMA)? Is there a custodial counterparty and, if not, how will assets be held and treated? How will data and client information be managed from a security point of view?
As an investment manager, having good governance in place to protect you and your clients is going to be crucial. Depending on the solution you adopt, it may be appropriate to set up a separate company which charges your advice practice a fee to cover the cost of portfolio construction.
It’s a good idea to talk to your platform provider as they can introduce you to the subject matter experts you will need. As always, whenever you are looking to implement material change to your business, it is good to lean on your community. Managed accounts have been around for a number of years now – so talk to others who have been on the journey and find out what has and hasn’t worked for them.
BT has one of the most experienced managed account teams in the market. Our well-established network of subject matter experts includes third party RE and MDA licence providers, investment managers and asset consultants plus risk and governance specialists.
For advice practices wanting to know what institutional grade investment governance looks like, BT can share insights into its own investment philosophy, policy and procedures. Our institutional investment management team is responsible for more than $46B in funds under management.
To learn more about how other advisers have tackled investment governance (and the costs involved) in their own business, you can listen to our ‘How to build the perfect investment governance framework’ webinar here.
1 https://investmenttrends.com/projects/planner-direct-equities-and-managed-accounts-report (no longer online)