Managed Discretionary Accounts Trend in SMSF Advice

At Superfund Wholesale we see many different portfolio management models being utilised by the advisers we work with. An emerging trend is towards Managed Discretionary Accounts (MDAs) which can provide significant benefits to both clients and advisers.

Traditionally with fully advised clients, the need to provide a Record of Advice (RoA) for every portfolio change tends to allow ‘inertia’ to take over the portfolio, and as a result things that should be sold often aren’t, and things that should be bought are left till ‘another day when I have more time to write the Statement of Advice / Record of Advice.

It costs advisers in terms of resourcing and staffing, and it costs clients because of missed opportunities and potentially higher transaction costs on the traditional platforms. Advisers we work with are constantly on the hunt for solutions that will save them time and enable them to provide high quality, personalised advice to their clients.

We took this opportunity to talk to some of the service providers who are helping advisers to overcome the problems associated with keeping portfolios in the right balance.

ASIC regulations are stringent in terms of trading a client’s account without the correct licences in place, as evidenced by a recent five year ban on a Macquarie adviser for ‘un-authorised discretionary trading’. Obtaining the correct licences and setting up the associated infrastructure would be out of the reach of most practices, but by partnering with the right providers, advisers can tap into portfolio efficiency at cost effective rates.

HUB24 are one of the leading technology providers in the MDA sector. We asked account manager David Leigh for comment about how advisers are using the HUB24 platform to improve efficiency.

“Good technology is an enabler, and can fundamentally change the way advice is delivered, and implemented,” said David.

“HUB24’s market leading managed portfolio capability combined with our state of the art platform implementation technology can help advisers reach a new level of efficiency. For example, a professionally managed diversified portfolio of direct shares will provide greater investment transparency for advisers and their clients, right down to the asset level.

Clients also get the benefits of direct ownership and with the help of their adviser, can have greater control over their tax outcomes, helping to minimise the CGT impact during portfolio changes.”

“Access to professional portfolio construction can lead to lower risk and better linkage between advice, product solutions and client outcomes. Implementation via the HUB24 platform means less paperwork and compliance and by netting all asset changes at an individual account level, transaction costs can be reduced. A professionally managed portfolio of shares also means an adviser doesn’t have to do the reweighting or reallocation, giving them more time to spend servicing their clients.”

The important point to make here is that HUB24 have the facility for advice groups with adequate expertise to set up an investment committee and make the key investment decisions and applying resulting changes across all clients in the specific model portfolios they’ve established.

Within that HUB24 custodial system, an adviser can also appoint managers to provide advice on discrete portfolios of shares. One of the leading providers in this segment is Lonsec.

Bill Keenan, General Manager of Equities Research had these comments on the service they provide: “Lonsec’s equity model portfolios are in increasing demand from planners looking for quality, low turnover portfolios, with a strong 15 year track record. Lonsec offers three key portfolios: Core, Income and Emerging Leaders; and all are available on HUB24 and other leading MDA platforms at a cheaper cost than traditional fund managers”.

You can obtain further information about the Lonsec Core Model Portfolio here (PDF).

Of course, the cost of platforms and payments to external managers may be something that you are trying to avoid, in order to strip out as much cost as possible for your clients. The feedback Superfund Wholesale receives from advisers is that SMSF clients are especially keen to reduce or remove that middle layer of fees.

To cater for this mindset we also spoke to Bruce Williams, Director of Elston, who have spent many years developing their ‘non-platform’ MDA service. We were particularly interested in their performance based fee structure which can provide strong correlation between portfolio performance and costs, something that clients are likely to readily engage with.

“The Elston MDA service is designed to provide direct beneficial and legal ownership of client’s assets and professional investment management based on true after-tax management of assets so the full benefits of strategic tax and planning advice can be realised” said Williams.

“As the name would suggest accounts are managed on an individual basis, providing a tailored, individual approach focussed on after-tax return catering to investors with a high sensitivity to tax, or those in beneficial tax structures such as an SMSF.

For advisers, the offering allows them to provide the type of direct investment solution demanded by high net worth and SMSF clients while enabling them to achieve scale efficiency gains within their practice. This is achieved through reducing compliance risk and costs, managing more clients with less people by reducing administration costs and time through systems and automation of reporting and corporate actions, freeing up advisers to spend more time focussing on core competencies and manage client relationships”.

Williams concluded by saying that “Practices can drive profitability and growth by eliminating platform costs and reducing investment and administration costs. This gives them the flexibility to increase advice margins at the same total cost to client or pass on savings to their clients. Technology and administration benefits allow firms to increase EBIT per SMSF client through vertical integration of systems”.

When it comes to vertical integration of systems, advisers also need to think through how their portfolio management will flow through to the clients’ accountant or SMSF administrators. There is little point managing a client’s portfolio in a more efficient and profitable way if their SMSF accounting fees skyrocket due to an increase in portfolio transactions that the local accountant may be handling manually.

Superfund Wholesale has been working with Elston for a number of years and more recently has been deeply involved in the testing and development of an automated data feed from their MDA to Class Super’s leading SMSF administration platform.

The recently activated Elston data feed provides us with daily portfolio information including trades and transactions, investment holding balances and corporate actions. Advice businesses using the Elston MDA service can tap into our complete SMSF compliance solution for only $120/per SMSF per month – which includes daily administration, annual accounts, tax lodgement, independent audit and technical support.

Just as it is with SMSF administration, by partnering with the right service MDA providers, advisers can achieve customisation that SMSF clients demand, while also being able to provide quality, sustainable, ‘industrial strength’ portfolios.

It’s all about a scalable experience for SMSF clients.

Insourcing, outsourcing, offshoring, co-sourcing: What they mean, and how they could help your business

Insourcing. Outsourcing. Offshoring. Co-Sourcing. You’ve probably heard of these terms. You may even know of companies that are using one or more of them to grow their business.

But what do these terms actually mean? And can you take advantage of them to grow your business?

Insourcing usually means performing a business function internally. For accountants, financial planners and SMSF administrators this could mean either:

– performing the work in-house
– bringing a third party outsourcer into the business to do the work.

Many companies prefer insourcing because it lets them maintain control of the entire operation. But insourcing does have its disadvantages. As part of its normal lifecycle, the business will be adding new services, products and processes to its overall operation. This can stretch current resources, create new processes that need a different skillset, and even have staff members leaving the company.

And when that happens, businesses often choose our second option — outsourcing.

Outsourcing involves transferring a portion of work or even an entire operation to outside providers or suppliers rather than completing it internally. Outsourcing has increased significantly in recent years as companies look for ways to improve efficiency and reduce costs. And with Australia’s high labour costs, and small- to medium-sized businesses often struggling to gain efficiencies in every stage of the value chain, it’s hardly surprising.

Offshoring (not to be confused with outsourcing) is when a company relocates a business process to another country. With many Asian countries having considerably lower labour costs, a lot of Australian companies look at offshoring work to further reduce their labour costs.

Compared to outsourcing locally, offshoring usually lowers their overall operating budget. But the loss of control, quality and associated business risks can increase significantly. That’s why some companies set up business hubs in these countries instead, employing their own staff who are then supervised by existing staff to reduce risk and protect the privacy of sensitive client information.

The most recent concept is co-sourcing, which combines some of the benefits of both insourcing and outsourcing. It’s essentially a business arrangement where the work is done by both internal staff and external workers. This can help businesses lower the costs of their back office or administrative functions while still controlling the critical parts of the client relationship.

Co-sourcing is based on developing a long-term relationship with a business partner. It emphasises traditional values of trust, excellent service and quality you’d normally associate with a partnership rather than a contracting arrangement. The business has more control over the operational process, and assumes a shared responsibility for delivering the final product or service to the end customer.

Here at Superfund Wholesale we’ve been providing dedicated administration services to advisors for more than five years. And we’ve seen co-sourcing work exceptionally well for businesses who use the right service model and take advantage of the latest cloud based technology.

If you’d like to know more about insourcing, outsourcing, offshoring or co-sourcing, and whether they could help you grow your business, get in touch with us today.

How to become a connected SMSF adviser

In late 2014 I attended the Xero Roadshow and was blown away by a presentation by Xero’s Steven Leaney on the journey to become a ‘connected adviser’.

I would define a connected adviser as: Any relationship professional who has leveraged technology and re engineered their business to make themselves invaluable to their chosen brand of client and in doing so creating almost unlimited opportunities for growth.

Although definitions may vary, the concept of using technology to create service offerings which make you the go-to guy (or girl) for your particular niche sounds pretty cool right? Delivering something that the clients you love working with will pay you handsomely for.

The following table compares a traditional advice (accounting) business to that of a connected adviser:

How to become a connected adviser | Superfund Wholesale

The presentation got me thinking, how can an adviser (financial planner, accountant, administrator etc.) working in the SMSF space apply the same principles and become a ‘connected’ SMSF adviser?

Applying the principles learnt from Xero, there are three key things an SMSF adviser must do to transform into a connected adviser:

  1. Identify your ideal clients
  2. Get your clients into the cloud
  3. Leverage and automate everything

Identifying ideal clients

This concept is nothing new so I will not rehash generic information about identifying and targeting a specific niche market.

What I will say is that to become truly connected with the niche you want to work with, you will need to ensure you adequately communicate not just how and what services you provide – but why you do what you do.

The best resource I can provide is this (edited) TED Talk video from Simon Sinek.

The idea is to ensure the clients you will be attracting and providing fantastic cloud based services to the clients that you as the adviser actually want to work with!

Get your clients into the cloud

The core of any SMSF service offering will rely on getting your clients SMSF accounting information into the cloud. Xero is the market leading the small and medium business cloud accounting space in Australia however currently does not have an SMSF product.

Class Super is the Xero equivalent when it comes to SMSFs. Although there are a handful of other providers, Class is definitely the most advanced and connects to the Xero ecosystem via an integration with Xero Practice Manager (formerly WorkflowMax). It is also worth noting that the majority of large SMSF administration businesses use Class Super.

From an SMSF advice perspective, a cloud solution provides the following benefits:

  • Access to the clients financial records anytime from any device
  • Accounts kept up to date through automated data feeds from banks, brokers and investment platforms
  • Single ledger means everyone can work on and advise from the same information (accountant, auditor, adviser, client)
  • Integration with other cloud planning tools such as Xplan
  •  
    In addition to using Class (or an administrator who uses Class) for your clients SMSF accounts, to become a connected SMSF adviser you need to look at cloud solutions for other aspects of your business. Your planning software, document management, CRM and marketing tools can reside in the cloud and you will need the flexibility the cloud provides to truly create the business you want.

    Leverage and automate

    This is where the fun begins. The connectivity the cloud provides enables opportunities to leverage the investment in cloud technology to automate routine processes within a business, creating efficiencies and the ability to take on more clients with the same number of staff (even for a sole practitioner) or to go deeper and provide more services to existing clients.

    Let’s look at the following example: A small financial planning practice differentiates itself by providing a small number of proprietary direct equity model portfolios to their SMSF client base. The process of re balancing client portfolios every time the model changed was manual and cumbersome, and took considerable staff time. Each trade had to be manually calculated on spreadsheets and the trade orders submitted individually to the broker.

    In addition the advisers within the practice always struggled to provide advice on the fly to the SMSF clients as they always had to cobble together ‘best guess’ information by combining out of date financial statements with transactional and investment data to get an up to date picture of each SMSF.

    An alternate cloud based solution this practice could use would include:

  • Utilising an SMSF administrator to move all their clients accounting onto Class Super
  • Plugging their models into a portfolio tool such as Financial Simplicity
  • Changing to a broker that could receive bulk orders generated from Financial Simplicity as well providing a data feed to Class Super
  •  
    Leverage Class Super | Superfund Wholesale

    Working in a clockwise direction starting with the adviser at the top of the above diagram, the integrated cloud technologies would come together as follows:

    1. The adviser would load their proprietary model portfolios (intellectual property) into Financial Simplicity
    2. Financial Simplicity would pull in details of the SMSF clients’ portfolios from Class Super and compare to the applicable model (determined by the adviser) to calculate the trades necessary to re-balance the portfolio
    3. Advice and compliance documents generated for clients and orders required to re-balance client portfolios pushed through to broker for execution in bulk
    4. Broker provides data feed of transactions and holdings to Class Super
    5. Adviser accesses up to date client portfolio through Class’ FundWeb online reporting or via the reporting integration with Xplan

     
    The above is just one example of how the cloud can be leveraged to enhance business efficiencies and service levels. There are many other areas within an SMSF advice business where other cloud and integrated technologies could be used including:

  • Billing and fee collections
  • Quoting and fee agreements
  • Review appointment scheduling and reminders
  • Marketing and client education
  •  

    Bringing it together

    Both the financial services and accounting professionals are in the midst of major disruptive change being driven from technology. With change comes opportunity and by leveraging cloud technologies SMSF professionals have the means to re-engineer business models to reach new clients or reinvigorate and deepen existing client relationships.

    Don’t let yourself be a servant of what is – become a shaper of what might be!