Taking the plunge

1. Will you offer a model portfolio or individual mandate?

Both are valid discretionary client management options. A model portfolio can provide great efficiencies and potential cost savings for clients but typically it does not provide the option to nominate specific assets in or out of the model.

An individual mandate, as the name suggests, can be customised around the specific assets a client may want to consider.

This provides them more control potentially about ‘what’s in and what’s out’ of the portfolio but at a higher price.

It is important to understand that every client will not want exactly the same managed discretionary account (MDA) and set some operational guidelines about how you are going to accommodate the various options.

2. Who owns the intellectual property being delivered to clients?

If you’re going to fulfil the role of operator and adviser then you will be responsible to the client for the investment program that is put in place under the MDA.

However, another model is to split the roles and have different operators with the adviser remaining as an ‘external MDA adviser’.

Then, the adviser’s role can be to construct the investment program and monitor that part of the service while providing the ongoing advice to the client and ensuring that the MDA is appropriate for the client.

If you decide to offer model portfolios within a managed account structure you also need to establish whether the model is ‘in-house’ or sourced from an external source (eg. research house or fund manager).

If you are to take on the responsibility for the investment program, then you need to implement a rigorous investment committee process.

3. How can you (profitably) run tailored approaches?

Start from the ground up and be very clear about the role of managed accounts within the practice.

Is it central to how clients are being managed within the practice or simply an option to be used occasionally with certain clients?

This will help determine the cost profile of the service within the practice and whether or not full or limited discretionary service options should be delivered and how.

For example, a straightforward model portfolio solution within a wrap account may be sufficient for some clients but not necessarily those that want more active control and involvement in the investment process.

It will also help shape the investment function and capacity of the business as well as how SMSF clients are going to be managed along the way.

To run tailored services efficiently requires a highly disciplined approach to service delivery to be able to cater for a wider range of investment mandates.

4. How can you control costs (eg. custody, admin, execution) when you don’t yet have scale?

Consider carefully where you are sitting in this service delivery chain, particularly when starting out without the potential benefits of scale.

Are you proposing to undertake the role of operator, adviser, custodian or perhaps simply start as an ‘external MDA adviser’, where you focus on the investment selection under someone else’s licensing capability?

This may help contain costs in the start-up phase. Alternatively, you may choose to work with simpler model portfolio options under other managed product structures if that fits the client requirement.

If you are going to undertake the role of MDA ‘operator’ it is important to remember you are responsible for the day-to-day operation of the managed account service, ongoing compliance, financial and licensing requirements as well as ongoing client reporting.

While you may contract out some of these service elements, since you are contracting (as operator) to deliver the discretionary service to the client you are ultimately the one responsible.

Tim Wedd is executive director of self-licensed financial planning boutique Crystal Wealth Partners and one of the architects of the company’s managed account offering.

He was formerly head of professional education at the Financial Review Group within Fairfax Media, a director of SMSF administrator Multiport and director of the Australian Retirement Income Streams Association.

He holds a Bachelor of Commerce from the University of Melbourne and a Diploma of Financial Planning from RMIT.