How to Maximise Adviser's Productivity and Minimise Risks in Operating Client's Listed Security Portfolios

Prepared By: Stuart Holdsworth, Managing Director Financial Simplicity.

‘I would like a share portfolio as part of my investments’ - Client

In recent times there has been a substantial increase in the use of listed securities in client portfolios, with a recent study from the ASX indicating that the predominant reason for this being client demand, making a portfolio listed securities an important addition to the use of managed funds.

The additional attractions of listed securities such as rapid order execution and price certainty provide advisers and clients with increased control over their investments compared with the application or redemption of many managed funds.

‘Managing many clients’ share portfolios is a never ending task !’ - Adviser

Whilst often quite simple to implement at the outset, a portfolio of listed securities is something that requires monitoring and maintenance for clients as security prices move, and the research associated with recommendations to buy and sell securities is also a moving target implying regular assessment in order to reduce both loss to clients, but also to minimise business and compliance risks.

‘My clients prefer an asset management fee to a transactional fee as it ensures that our interests are aligned’  - Adviser

It is this monitoring and ongoing maintenance of client portfolios that allows advisers often to charge on ongoing management fee associated with a client’s portfolio rather than the transactional remuneration alternative (brokerage). Charging an ongoing fee brings the remuneration interests of the adviser in line with the client, however does introduce a responsibility for the adviser to maintain a watching brief on each clients’ portfolio.

‘Applying our up to date investment decisions across all our client's portfolios and mandates is a labour intensive never ending task and prone to risk, it inevitably limits our ability to optimise investments and deliver client service’ - Adviser

In monitoring client portfolios, the situation often starts to get more complex (and the workload increases) when the instructions from a research group may conflict with the situation of the client, particularly when capital gains tax and client personal compliance considerations are to be catered for (such as a client having pre-CGT stock that should not be sold, or the client is prevented from purchasing securities in a company as they may be a partner of the company’s auditor). Combined with the frequent situation that market movements or research recommendations happen at unpredictable times, and not necessarily in a timely fashion for client reviews, it means that the adviser workload to effectively manage client listed securities portfolios can become substantial, unpredictable and interrupted, detracting from core services of client relationships and management.

‘The concept of a middle office that separates investment management from client management means that advisers and dealers both win by efficiently bringing together what they do best’ – Dealer Group

An alternative and common solution is to separate the role of portfolio manager from that of client manager and introduce the concept of a ‘middle office’ function that takes on the role of maintaining the watching briefs on client portfolios, allowing advisers to focus on client relationships and financial strategies, and address client listed security portfolios on an exception or ‘as needed’ basis.’

‘The use of technology in the middle office to automate processes will give us a significant competitive advantage, improve client to adviser ratios, and reduce business risks’ – Practice Manager

Middle office operations today can be vastly enhanced in productivity by the use of technologies that can automate the monitoring of very large numbers of client tailored portfolios, combining client holdings, client specific rules, and research recommendations as they are published from research groups. Not only does this represent a significant productivity improvement for advisers but also reduces compliance and business risks at the same time for both adviser and dealer group.

With these technologies now also being offered as services over the Internet, the extent of this productivity can be such that practices can efficiently deliver the benefits of listed security portfolios to large numbers of clients with minimal overheads and reduced business risks, providing clients with a low cost alternative to the use of managed fund products.