The importance of systemised rebalancing

Article in IFAOnline today here about how systemised rebalancing may not be treated as requiring discretionary authorities by advisers.  This, I think, provides some insight into regulatory thinking.  It  also raises quite a few questions, some being:

Q) Who defines the rules for sysemised rebalancing? And what is acceptable?

Q) What happens if the client has made some specific instructions (or combinations of) that the systemised process cannot accomodate?

Q) Is there a set periodicity that can be mandated for rebalancing portfolios? What happens if something important occurs in the middle of that period?

Q)  Is a systemised process the key aspect here? Or, is the key aspect how the systemised process is used for clients?

Whilst systemisation is clearly a step forward in removing arbitary decision-making (and perhaps bias), the most important aspect in this discussion is about what is most suitable for the client in the rebalancing process. In other words, there is not a 'one size fits all' here.

I imagine the firms that accomodate client-centric and client-directed rebalancing will pass all tests (regulatory and client satisfaction)!

Centralised or Decentralised Investment Propositions

Much talk over here at the moment in the UK about centralised investment propositions. In short, this appears to be about operating a centralised process of investment management for a broad range of clients: these are most often segmented in a sensible manner allowing for risk tolerance and investment timeframe.

However, running contrary to this view, there is much talk also about the need to have client-specific investment propositions that are tailored to each client.  Indeed, there is an emerging school of thought that it may not be good practice to just move clients into a centralised investment proposition.

Mmmm. I sense an issue here.

Perhaps there is an answer in between that addresses both views:

• Centralise the common aspects of a centralised investment proposition such as investment research or model portfolios, centralise the technology servers to help advisers make decisions, centralise the data feeds to provide portfolio context; and
• De-centralise the use of the technology, and the client-specific directives into the implementation process so that whomever is dealing with the end investing client can ensure that the common philosophy and process are implemented according to the client's situation

Hey presto !

The devil is in the detail here, but with the right technologies and processes, why can't the industry have the best of what initially may appear to be conflicting directives?

The Importance of Emotion

I am reading this great book 'Firms of Endearment' (which you can buy on Amazon). I strongly suggest anyone who is supporting a consumer business should read this book. Whilst I am only a little way through so far, one of the points the book makes is about the importance of arousing emotions in dealing with consumers.

 'A brand or company that fails to arouse a consumer's emotion in positive ways will not have consumer's loyalty. And the same holds true for employees'....

So, what has this to do with retail investing and the wealth management industry? Quite a lot I think.

Firstly, that interaction with consumers and retaining loyalty (in order to retain and grow revenue streams) means more providing content in the context of each consumer to arouse emotions. Those propositions that are too blunt and just about the product, instead of about the client, are likely to suffer. To really be about the client, it means it has to be about their investment portfolio, their situation, and their performance.

Secondly, unless a firm is passionate about what it does in the context of the consumer, it may struggle to retain talent also. Firms moving from an absolute culture to a client culture are more likely to attract and retain the best, motivated people.

Roles in The Retail Investments Moving Forward

So change is happening....We are hearing more from client facing groups about how they are going to change the industry dynamic, become investment 'manufacturers', pay platforms rather then receive monies from them, and change a lot of the industry from 'price makers' to 'price takers'. What is this going to mean in terms of the roles (and titles) of industry professionals, their firms, and where is the big money (or just survivability) going to be ?

Whilst I suspect there will be variants, in this new world it seems that the key roles may be:

• Client Advisers - this is all about providing 'context' for the client to help them make decisions within. Whilst the people that cant afford to see professionals to provide such may have to go on-line (and there are some great new sites to help them), the ones who can afford such will be paying client advisers for context in conversation. The more complex a client's situation, the more the challenge to find the right 'context', which will most likely include attitude to risk and loss (Thanks Paul !) . Should the client context fit within an advisory firm's scope, an output from the process of determining context is setting and choosing investment strategy with any accompanying client specific instructions. As value is what is received by the client, not what is given, it is likely that those advisers with the skill and ability to provide real context to clients will be in a sustainable businesses.
• Asset Allocation and Selection Experts - whether this be working out asset allocations that suit clients attitude to risk and loss, or the selection of individual investments (whether funds, ETFs or stocks), these people are going to be the ones responsible for constructing a variety of model portfolios with 'target' or 'theoretical' allocations to asset classes or assets.  These are the model portfolios that the advisers choose for their clients. The more sophisticated firms will seek to extend to separating asset class categorisation from specific investment selection as they realise that clients current assets don't need to be replaced to support a desired asset allocation. People in these roles may use a variety of techniques to determine their selections, may end up being largely quant driven, and may adjust their model portfolios on differing time frames depending on what the purpose of the model portfolio is. Many suspect that these roles will be either salaried in house employees to advisory firms, or perhaps specialist groups who provide such on a contracted service basis.
• Implementers - these roles are the people in a model portfolio based world that do the manufacturing within client portfolios. Constantly monitoring the changes in drivers of client portfolios (ie market prices, model portfolio constructions, or client rules), this role is responsible for ensuring that (and will be measured by how well) client portfolios track their nominated mandates (model portfolios combined with client specific rules, preferences and constraints) as determined by the clients' advisers. Good implementers will react quickly to changing market conditions and model portfolios to outperform their competition to leverage the capital markets. Implementers get efficiency of scale by working their client portfolios as an overall book, treating clients fairly and getting economy of scale. Service levels will be the key differentiator followed by price and I suspect that there will be a few high volume providers or enablers (like Financial Simplicity) that will fill or support this space
• Dealers - these will be the people who attain the results from the market that the implementers deem appropriate for the client portfolios. Dealers are close to the markets and good ones reliably perform by getting results for their clients, whether just in terms of service levels or price efficiency compared to others.
• Platforms (or Administrator) - these will be the businesses that operate 'asset containers' on an outsourced basis for investors and advisory firms, and will be paid service fees as opposed to out of client's assets. It is shaping up that this area of the industry will be differentiated by ease of access to information, technology integration, range of investments available and service levels first, and then price second as pricing levels will be driven down by high scale operations.

The Difference Between Discretionary Investment Management and Model Portfolios

I have been involved in much discussion in the last few weeks about the difference between Discretionary Investment Management (DIM), often a service to the wealthy, and the use of model portfolios which may be 'managed' by investment platforms.

At first glance there is some similarities from an operational perspective, especially if a DIM firm uses model portfolios as a starting point for packaging investment research into a form of scalable offer to many clients. Similarities can include the use of model portfolios and an authority for someone to occasionally rebalance the clients portfolio towards the model portfolio. However from a service proposition perspective things can be quite different, as I have tried to bring out in the diargram below:

 From a servicing proposition, a DIM is usually pretty clearly responsible for all aspects of the service to a client. the DIM firm packages up research, investment selection, portfolio management and administration often into a single accountable offer.

The provision of a vanilla model portfolio service clouds the proposition a little in the sense that the model portfolio may be sourced from a third party, and the implementation of the model portfolio may also be performed by a third party (usually a platform) also. However with adequate discolsure and explaination, these 'straightjacket' model portfolio offers are getting increased traction, albeit with some concern from regulators and commentators, who are suggesting that the 'implementation' of model portfolio decisions may need to reflect the clients' specific situation. These concerns seems pretty reasonable as the implementation process is actually often buying and selling investments for clients and whilst such decisions may be accurate in the context of a model portfolio, they may may be not in the interests of the client. MMmmmm. So how is this possible conflict to be resolved ?

The answer must lie in allowing adviser or clients to provide some instructions on how to implement model portfolios for their specific circumstance. At Financial Simplicity we call these clients rules, preferences and constraints, and believe that the ability for advisers to provide such instructions help implementers (who have no relationship with the client usually) deliver improved service to investors, and hence support their advisers, aswell as address concerns about investors receiving a '1 size fits all' experience against their wishes.

Clearly this does however create a headache for implementers not equipped to deal with such instructions from advisers and their clients, and the problem magnifies and magnifies the larger the client base becomes. This is where specialist technologies come in..

Clients pushed into model portfolios

Interesting article on the FT web site about how retail investors are being pushed into unsuitable “one-size-fits-all” investments as portfolio managers change their offerings ahead of new regulations, the UK’s financial watchdog has warned.

The article is at:

http://www.ft.com/cms/s/0/bc9622c4-7e3c-11e1-b009-00144feab49a.html#axzz1rtUjoCFX

Whilst the article doesnt give the answers, it does lead to many questions about possible floors in the product based regulatory regime to date. Some things come to mind:

• what is the 'risk' profile associated with the offer to the clients, is it that of the 'risk' profile of the 'product' or the overall 'portfolio' (in this case model portfolio). As most people know, the 'risk' of a diversified portfolio of risky 'products' is diminished when offered as a portfolio ...
• what is the basis for assessing 'risk' ? Is it based on the past volatility of investment valuations ?, is it based on the relative level of valuation of such assets (which more and more portfolio managers seem to be working on), is it based on the 'risk' that the client feel comfortable or not, or perhaps even meet their goals ?
• is it appropriate for clients to be 'shoved' into what we are now calling 'straightjacket' model portfolios (one size fits all) ? or is a level of client specific overlay a basic fundamental part of assigning a model portfolio to a client, and the ongoing portfolio management to such ?

My belief is that we are in transitionary period in the wealth management industry where we are moving from a mentality about using modern portfolio theory to justify prescribed asset allocations according to industry practice, and often being an excuse to sell products to fit, to one where wealth advisers are going to have to be more pragmatic about how they manage their client portfolios on terms that the client understands, such as 'we will buy this now as we think it is cheap' etc.

The question that follows then is 'do model portfolios achieve this ?', or more to the point 'does the technology and operational processes that you have in place support this type of client engagement ?'. At Financial Simplicity we have worked with some great individuals and firms to possibly have the answers.

Flaws in advice system revealed by ASIC report

Does the below article suggests change is coming ?

http://www.financialstandard.com.au/news/view/12787507/