Episode 9: Leveraging SMAs with Chris West & Mike Parker from Context Capital

In this episode, Rob Pyne explores the intricacies of Separately Managed Accounts (SMAs) with Chris West and Mike Parker from Context Capital. SMAs have rapidly emerged as a preferred investment solution, offering transparency, efficiency, and fairness for both advisers and investors. Rob, Chris and Mike dive into the operational, regulatory, and strategic benefits of SMAs, uncovering their growing impact on the financial planning industry.

LISTEN

SHOW NOTES

What are Separately Managed Accounts?

  • Definition and positioning between unit trust model portfolios and SMAs.
  • Key benefits: Transparency, fairness, and streamlined execution.

Efficiency and risk management in SMAs

  • How SMAs reduce paperwork, improve investment consistency, and minimise execution risks.
  • Operational advantages for financial planning practices.

The SMA ecosystem

  • Role of Model Managers, platform providers, and custodians.
  • Factors influencing the selection of SMA providers and platforms.

Adviser responsibilities and opportunities

  • Transitioning to SMAs and understanding new obligations.
  • Balancing bespoke investment solutions with scalability and accountability.

Designing and implementing SMA solutions

  • Context Capital’s onboarding process: Discuss, Debate, Decide.
  • Timeline and steps for setting up bespoke SMA models.

Scalability and client engagement

  • Typical scale requirements for adopting SMAs.
  • Insights into improved client engagement and retention through SMAs.

Future Trends in SMAs

  • Anticipated regulatory changes and the increasing convergence with superannuation standards.
  • The role of technology and innovation in driving better client outcomes.

Key takeaways

  • SMAs provide financial advisers with a scalable, efficient, and transparent solution to manage client investments.
  • The choice between off-the-shelf and bespoke SMA solutions depends on a firm’s identity, investment philosophy, and client needs.
  • Thoughtful implementation of SMAs can significantly enhance client retention, engagement, and business growth.

Resources and links

Quotes

  • “The number one benefit of SMAs is fairness, ensuring consistent outcomes across all clients.” – Chris West
  • “It’s about reinforcing your identity as an adviser while leveraging the scalability of SMAs.” – Mike Parker

TRANSCRIPT

Welcome to The Trusted Adviser Podcast where you get a deep dive into the world of financial planning with industry leaders who shared their stories of winning and learning as they chartered their path to success. This podcast is for the curious, those of you that like to dig into the detail that sounds like you get ready to listen and learn.

Rob Pyne:

Welcome to the Trusted Adviser podcast. Today we’re diving into a topic that’s reshaping the way advisers manage investments for their clients with separately managed accounts or SMAs. Joining me are Chris West and Mike Parker. From Context Capital two, industry experts who specialise in helping financial planning practises design and implement effective SMA solutions SMA have become a powerful tool for advisers offering transparency, fairness, and scalability, but they also come with unique responsibilities and opportunities. In this episode, we’ll explore what SMAs are and how they work, the operational efficiencies and risk management benefits they bring to advisers. How to select the right SMA provider and platform, the critical considerations for transitioning to and scaling an SMA solution and the future of sma, including regulatory trends and innovations shaping the industry, whether you’re an adviser looking to enhance client engagement or a practise owner exploring ways to scale your business, this episode is packed with insights to help you stay ahead in a competitive landscape. So grab a notebook, settle in, and let’s get started. Welcome Chris West and Mike Parker to the Trusted Adviser podcast. I’m really looking forward to having us chat with you today guys, because separately managed accounts has become a major theme over the last few years and we ourselves don’t yet use separately managed accounts in the form that I understand them to take, but I do want to learn more and that’s why I’m keen to listen to what you guys have to say today. So welcome board and look forward to digging into this with you.

Mike Parker:

Thanks very much Rob. Looking forward to today’s session.

Rob Pyne:

Alright, so let’s start perhaps with you Chris, you are the technician in a separately managed account space, so perhaps could you start by explaining what a separately managed account is and what benefits they offer to advisers and investors?

Chris West:

Thanks Rob. I think often when people start discussing separately managed accounts, there can be a lot of confusion and like anything financial services, people in outsource position, we can be guilty of hyperbole, but really if you want to understand it, absolutely at its most basic level, the way we think about it as a separate managed account is in between a model portfolio and a multi-manager unit trust. So if you think about a model portfolio, you’ve got a investment philosophy and approach identified for an advice firm and you’re saying Here’s the different types of investments I would like to recommend to my clients on a consistent and fair basis with some tailoring here and there. And then at the other end you’ve got a unit trust that might have a number of different asset classes and managers underneath and you just invest in that one solution.

It might be managed by one manager, it might be managed by multiple managers. The separately managed account sits in between where it’s sort of unbundled relative to unit trust. So you see the underlying holdings, whether that’s direct securities or whether that’s ETFs or whether it’s managed funds or a combination of all three of the above. And instead of it being undertaken like a model portfolio where you’re needing to produce some sort of advice document and the client’s consenting, you’re actually able to provide the investment changes and decision-making on the client portfolios on a consistent basis and a fair basis across the clients who are invested in the portfolio. So if we think about that, again, it’s halfway in our minds, halfway between a model portfolio and a unit trust where you see that things that are underneath but it’s actually invested consistently between the different clients, whether that’s a direct share, an ETF or a managed fund.

Rob Pyne:

So the investor gets transparency, that’s a key. Plus you also get this opportunity for the adviser to execute on a transaction across an entire client group in a particular model, which is one of the things you talk about when you talk about saying fairness. Is that what you’re referring to Chris?

Chris West:

Yeah, absolutely. So if we go to those benefits, to us the number one benefit is fairness, which means if you as an investment committee of an advice firm or you’re outsourced provider, depending on how much delegation you’ve provided to an external provider, the decision is applied consistently at the same time in the same way across the clients because one of the challenges, no matter how sophisticated a consent based implementation is, you can have lags and the evidence shows us that there can be a detraction from lagging in how you implement a portfolio. Think about a scenario like the covid situation in 2020. We’ll not even talk about being active in terms of making a decision about being overweight or underweight something. We’re just thinking about the real operational basics of rebalancing. Now if someone’s come back to you quickly with a rebalancing approval, they’re going to get a very different result versus someone who’s got it later.

Even worse is the situation where clients are only rebalanced on their own review. So if you think about someone who’s reviewed in April, 2020 versus October, 2020 or even April this year versus October this year, you actually get quite different results in terms of the client’s return outcome. And a question we always think it’s worthwhile and advice business investment committee compliance committee should consider is why should there be a different outcome for the different clients depending on whether they’re seen during the year. So that’s the absolute number one benefit and that client-centric benefit should trump everything else. There are other benefits such as efficiency for the advice practise because reducing some paperwork, there’s also the benefit and option of increasing the investment resourcing into your making, but we think the fairness piece comes first and efficiency and the investment resourcing, those are three key pieces.

Rob Pyne:

Speaking of that efficiency, so you’re talking about not requiring client consent to make changes, preordained, they’re actually in a model that will be rebalanced for them and altered as per the terms of the investment manager and the SMA provider. What is the, I guess, risk management benefits of an SMA? I mean I can think of them as someone who has some clients in model portfolios in our firm. One of the things you talk about as efficiency in terms of efficiency, how do we ensure we don’t create execution errors if we’re running model portfolios? I mean that’s got to be a key benefit to an advice firm.

Chris West:

I think that comes down to that efficiency piece where if you think about when you are executing a change across a number of clients, however you’re executing that change, whether that’s on review or in terms of some sort of bulk consent process, the number of points of failure is significant because you’ve got each time that is keyed into a client’s account no matter what the underlying function leader platform is. But when you’re going in the managed account space, you do have the risk management of the platform and the external professional who will generally have quite strong operational controls. They’ll have robustness, they’ll have technology in place, but also they’re only making a small number of physical changes or decisions which are then applied consistently, meaning the number of points of failure is much lower. So you are both reducing that paperwork, but you’re also reducing the risk for the practise and ultimately the client because there’s less things that can go wrong.

Rob Pyne:

Sure. You mentioned there a moment ago about delegation. Perhaps I’ll ask you this question, Mike, in the ecosystem of separately managed accounts, if advisers are wanting to work with a separately managed account provider, walk us through the key service providers in the SMA ecosystem who’s in the zoo if you like, when you actually do go in this path of the separately managed account?

Mike Parker:

Sure. So there’s probably three key providers and some subsets underneath. First and foremost, there’s sort of who is the model manager. So the model manager can be a traditional asset consultant or it may actually be an asset manager that has chosen to put together a portfolio of their security. So there’s the model manager with those two. As a subset, there’s the platform provider and they provide potentially two different services. One is custody over the underlying assets and then secondly, and most platforms can choose to do this in-house, provide re services, so they’re the responsible entity for the managed investment scheme. There are standalone re providers and there are some platforms out there who choose to rather than insource, the re services will actually use a third party and that has some benefits in terms of portability of the underlying PDS across different platforms.

Rob Pyne:

Is that why people would choose to go with an independent That isn’t the platform

Mike Parker:

It can do so if you’re a practise that has multiple wrap platforms, having an external simplifies the process of having one portfolio across multiple platforms.

Rob Pyne:

Okay. So let’s speak about the other people in the ecosystem there. You talked about asset consultants or potentially an asset manager. There seems to be a proliferation of people stepping up as asset consultants on the rise of separately managed accounts as a viable option for practises who want that efficiency that Chris spoke of. So what in your experience has been the way in which advice firms are tackling that issue?

Mike Parker:

At the end of the day, it really boils down to specific needs of the practise, but our observation is that this world of asset consulting asset managers running SMAs, a useful line of demarcation is that around product versus service. So an asset manager who typically has an investment philosophy or investment way, we would sort of suggest they would come a little more at a product centred offering, which is fine for many, many practises and there’s very, very good operators providing such portfolios. At the other end of the spectrum is the concept of a service provided by asset consultants. So this is a service which is not so much defined around a portfolio which is pre-baked, but by a service that will work with a practise to understand their philosophy, their needs, and build a portfolio which is specific to that practise DNA. They’re both absolutely valid and there’s great operators as I’ve said in sort of either into that sort of spectrum really just boils down to the needs and requirements of the practise.

Rob Pyne:

Is there a size and capability correlation there? Firms that actually have some deep skill and expertise in running investment portfolios that might want to take the load off their shoulders and actually bring an asset consultant at the table, but they have themselves a pretty strong view of the world of investments versus a smaller shop that might say, look, we haven’t got the capacity or capability to do that. We’d rather just have an investment manager take that load off us and focus on where we add value, which is strategy and goal planning and the like. Is there a correlation there, Chris?

Chris West:

From our perspective, the correlation is slightly different. It’s actually about identity and so where you have firms that have a really strong philosophy and identity about how they believe advice should be given and the investments in any case, whether someone includes investment as part of their value proposition and believes part of their competitive strength or it’s purely that tool to serve the advice piece where we see that differentiator more about how strong the firm’s identity is and how that investment piece of the puzzle fits in the overall advice proposition for clients. So yes, you definitely see some firms with internal resources. There are a number of firms, particularly some of these larger firms will have internal resources, but it’s not a correlation between size and preference for asset management versus bespoke or consulting focus service focus. What we actually see is quite often with the very large firms, they’ll actually go a pure outsource approach. It actually becomes too complex to manage it the very, very large end. They’ll end up with effectively an a PL of managed account providers. They might have three to five on an A PL and choose different ones. So it’s much more actually in our experience based on the strength of the identity of the firm and how the investments feed into the advice piece rather than specifically the size of the firm or even the number of people with investment experience in the firm, which is perhaps counterintuitive is definitely observation that we’ve seen.

Rob Pyne:

Okay. I just want to dig into that a bit further. So the identity of the firm really determines how they want to go out and build that investment piece. So do you see firms that are coming to you that are doing, I mean I was just reflecting on the fact that some of the people I talked to about mergers and acquisitions, they really run a mile from business owners that are actually running direct stock portfolios and trying to pick the market for client. Still there’s no scalability to that. It’s very hit and miss in terms of its ability to beat benchmarks. So do you see people coming to you that have been traditional stock picker style investment managers in the financial planning world and saying, well, can I make this more systematic? Can I get you to help me turn this into a scalable solution where I’m still offering that transparency, people want to see what stocks they own, but I really can’t scale this the way I’m doing it presently. Is that something you’re seeing at

Chris West:

All? We definitely see that in the whole industry, the specific use case you’ve got there. There might even be some other providers in the industry that might be more suited to help that type of firm than us ourselves at context, lots of good providers. As you mentioned, there’s been a bit of growth in our space and our viewers that advisers are in a good position because there’s actually quite a number of good options and it’s about what’s the right fit in terms of the m and a situation. There’s an interesting observation there around just like when you’re bringing together cultures of advice firms, you need to bring together the advice philosophy and the investment philosophy. And we’ve seen a few situations where it’s been done really, really well and actually getting in someone like us to help bring together the different perspectives to provide an approach going forward can be done really well.

But when it gets ignored, it becomes one of those things that can bubble up on the side and it comes out a little bit later during stress periods where one set of clients is expecting one type of experience and the new solution or the standardised solution of the incumbent firm might be completely different. And so really those m and a situations we see those really thoughtful firms looking at how do I provide an investment experience for the clients and how do design it properly? There’s a real differentiator between the firms who are considering that alongside integrating culture and thinking about it in the same breath rather than it just being a pick and lift type approach.

Rob Pyne:

So in the role of the adviser then give me some perspective on what additional responsibilities an adviser takes on as they step into this space. What things would they be not used to doing running a typical model portfolio and now they’re saying, well actually I want to get a more scalable solution, less execution risk. What responsibilities are they taking on in that transition?

Chris West:

There’s two sides to that coin. One is the responsibility and one’s the opportunity. So if you think about, you’ve referenced the opportunity there of providing that scalability, the fairness, the efficiency, the consistency. But on that spectrum between taking I guess an asset manager approach where you’re effectively just replacing the choice of a fund manager with a choice of a model manager that’s at one end actually your responsibilities are probably quite similar except now that your decision is more like just using one multi-manager quite similar. Whereas if you think about the responsibility change as you move to, okay, while stewarding a model portfolio, but in many ways it was a little bit paper-based, something that we do think people need to be aware of. And in our onboarding process we give lots of opportunities to exit and say no because you want to make sure you know what you’re getting yourself into because when you are looking to actually build something that’s purpose built for your client base, and as you get more bespoke, more branded with your own firm’s name because often these things have your own name on them, that’s a different set of risks and responsibilities because ultimately now as an IC, you’re going to be assessed and your partner, your model management partner or asset design partner are getting assessed by those not just the responsible entities on the platforms but also those superannuation trustees.

And if you think about the regulation and standards that are in place there now, those bars are quite high. And so it’s really about making sure you’re prepared to have the rigour, to have the documentation to have the appropriate due diligence undertaken, which as I mentioned before that there’s quite a few really high quality of our peers that you can choose from to help you with that, but it’s really making sure that’s in place and part of it and then having that accountability, whether you’re taking some decisions yourself or you’re fully delegating those decisions to the provider, understanding that there’s now a portfolio that might have your name on it that has a performance number on it that’s quite different set of risks to I’ve got a model and I can change some managers in out. It’s not completely a free lunch. In that sense, there is that increased accountability and I guess regulatory consideration from the superannuation trustees that are going to be looking at.

Mike Parker:

And I think that sort of highlights just a nice difference between a product style solution versus a service style solution. Both equally correct, but it really depends around what’s the level of conviction at the practise level around say a bespoke multi-asset portfolio built to their philosophy versus something which has taken from the shelf.

Rob Pyne:

It’s a really good insight, isn’t it, that I actually really want to just spend a second to recap that point because it’s not a small issue and I was just going to ask you the question of have you seen people start to onboard and then go actually when you are giving people lots of opportunities it said there Chris a moment ago to opt out to basically stop ’em in their tracks because they haven’t considered ramifications of what they’re about to take on. That responsibility piece is interesting. We’ve talked about the opportunity, there’s clearly advantages here, we know those, but that responsibility piece is not a small issue to be seen to say you put your name on these models and you are now being seen to be part of the investment outcome and if you’ve chosen well, you are just held accountable in a different way to being an adviser with a brand name investment manager on it, that’s really interchangeable in the client’s mind, but the adviser doesn’t have that same connection and attachment to the end result. I think it’s a really, really salient point to pick up on because I hadn’t really given it that much thought before.

Mike Parker:

This is an area we do lots of work as part of our sort of onboarding robin that we’ve certainly had circumstances where we’ve had some prospect clients and we’ve mutually agreed that actually a bespoke service based on my philosophy is actually not quite what I’m looking for. So ultimately for us to help a practise who might be feeling like they’re in sort of manage our whack-a-mole mode, the important shift to be made is around their investment philosophy, really helping them understand what it is that they stand for, what do they believe is true in markets. And as we progress through that sort of process, firms will quickly realise whether a bespoke solution is right for them or whether something off the shelf is probably a better selection for them. As I said, they’re both equally good answers. It really just depends on the nature of that practise.

Rob Pyne:

And apart from that really important point, what are the other considerations should a planner be taking into account when they’re deciding to set up one or more model portfolios making up a suite perhaps of SMA models? What other considerations should they be really thinking through before they make this jump?

Mike Parker:

Well, I think first of all they’ve got a real clear understanding of how is all of this going to leave my client in a better position. And so the list of things to work their way through is, okay, what new capability and resource am I now tapping into which is bigger than just me and my practise that might’ve been putting together some portfolios with a retail research house. Other salient points would be, okay, who I choose to partner with are there scale benefits which could leave my clients in a better position from where they are with exactly the same managed fund at the moment. So there’s a whole notion of rebates. And thirdly, before I hand to Chris here, I think just being really clear around, well my value proposition to clients, where is investment? Is this a way that I want my practises DNA to be expressed? And if it is, that’ll tend to give the support for conviction. And there’s plenty of practises that have an offering which is based around high technical touch might be service orientation around whole of financial life circumstance for client or services to clients. And in that case, investments per se might not be as high on the radar as say other types of firms. Chris and I, have you got anything else to add to that?

Chris West:

Yeah, the additional one that what we’ve seen work really well Mike, is looking at the situations where practises have been really, really clear about who they think this is being designed for and therefore who it’s going to be suitable for. So not prefabricating advice or anything like that, but if you think about I’m trying to solve a problem for this client set and for some firms that is the majority of their client base. For others it’s actually a component and being really upfront and clear when you’re designing the solution and trying to in your selection process both of your provider and how you put together the portfolio, if you’ve got more of a service model being really mindful of who it’s being designed for so it can give them a better outcome, more specific to the needs they have. We actually have scenarios where it might be specifically designed for clients with a lower thumb level and for other firms it’s actually ones with a higher thumb level and for another set it might be the ones where it’s the clients aim that pre-retiree or retiree phase and they’ve got a set of gold space solutions and for those accumulators they have just something off the shelf.

There’s no fixed way of how to define that, but we think it’s really important to workshop and work through internally, okay, why am I doing this? Who am I doing it for and therefore how do I best choose and build something that really serves them well, which we think all good advisers would agree that that’s a really good thing to do

Mike Parker:

And a solid way of really capturing all of that is through a well constructed and thought through RFP document, which he can put out to all the various sort of players that are in the market. So typically a good RFP will contemplate all of those things, which Chris has just sort of mentioned and having that documented just means an adviser practise can go in really knowing what’s important to them.

Rob Pyne:

I know what RFP means, but for our listeners, Mike, who don’t

Mike Parker:

Request for proposal,

Rob Pyne:

Yes, so you’re putting it out there and getting people to put their best foot forward, but you’re giving them the terms that you’re actually wanting them to address in considering which SMA provider might be the best solution.

Mike Parker:

Absolutely.

Rob Pyne:

Yep. Okay, so let’s move to costs because ultimately it’s always a big factor. People are building model portfolios, they may have some predetermined preferences there that are very cost effective. I know index funds have become a very strong part of people’s portfolios to build a core satellite approach perhaps, but there’s many out there still building very active portfolios. So could we discuss the costs involved in setting up and maintaining an SMA portfolio and how does it compare to a typical alternative model portfolio approach that people might be using presently?

Chris West:

Yeah, so Rob, if we take it relative to a model portfolio, there’s various ways providers look at the onboarding period. Generally that’s not going to be material in the scheme of things. In most cases for most providers what they’ll do is they’ll put some degree of investment management cost in the product so the clients will ultimately pay for that and therefore all else being equal, if you just took the exact same funds at the exact same price and added the cost of your as consultant or model manager and responsible entity, you’re adding costs. So there’s a higher cost to start with. However, the investment management industry will look at the SMA space more like a quasi institution or an institutional investor and therefore rather than looking at it as a, well that’s a series of 10,000 or a hundred thousand investments, they’ll go, you’re allocating 20 million or 50 million or a hundred million dollars.

So I’m actually going to look at institutional pricing and there’s some differentiation in our space on that basis, but most of the quality providers who an adviser would choose from would have some degree of good scale benefits they could bring to the table. In our experience, in many cases, not every case, but a lot of cases what you’re actually getting, even when to your point Rob, about suggesting some advisers have the core satellite or passive allocations and other advisers might have a large active allocation even with passive funds, most of the good consultants will be able to provide a scale benefit to that end client that should make it cost neutral or net actually lower cost for being in the SMA structure versus a standard model portfolio because you can either get rebates or you can get lower fee share classes that the managers make available on platform.

Rob Pyne:

Yeah, that’s a bit of a revelation, isn’t it? Because essentially if you can deliver a more scalable, less execution risk and efficient portfolio and fairer for the end investor without necessarily passing on an overall increase in costs to them for those benefits, then clearly there’s something to be said for why managed accounts have become a very strong trend. And in fact, speaking of a trend, I was actually sitting down at a conference the other day, I was actually on a call actually the Dimensional was hosting and Hub 24 were on there as a guest panellist and they were talking about the volume of money they’re taking on separately managed accounts. Do you get visibility over that sort of where the volume’s going? I mean because they’re a platform obviously, whereas you guys are agnostic on platform, I understand you are providing administration service and really meeting the needs of the firm you engage with whatever version of investments they want to try and create, but are you largely agnostic on platform or you’ve seen preferences there as well?

Mike Parker:

Yeah, so there’s a couple of ways to slice that, but certainly from our perspective we’ll work with that practise their taste and preferences, everything from investment philosophy through to existing sort of platforms. So our job is to be in service of those needs. So again, from our perspective, definitely agnostic, but the reality is different platforms have different capabilities in terms of the manager portfolios that people like us will interface too. So certainly the contemporary platforms that are out there have good systems and controls that us as a model manager give us lots of confidence around portfolio execution risk, et cetera.

Rob Pyne:

So is it capability of the platform as well as perhaps their appetite for it? Some may have the capability and I’ve just heard over the last 12 months or so that some platforms where once they might have been quite resistant to adding SMA providers onto their platform have shifted their perspective and are now making themselves much more readily accessible as far as firms looking for an SMA solution. Is that something you’ve seen?

Mike Parker:

Yeah, I mean the reality is we’ve seen the industry flows into managed accounts as such it’s a tidal wave which is not sort of going away. The platforms however do need to invest in themselves to upgrade their technologies to cope with bespoke SMA reporting and transaction sort of requirements. So ultimately there’s a business decision that those platforms need to make around needing to invest first to be able to partake in that tidal wave.

Rob Pyne:

Do you want to make a call on the platforms you’re seeing that are well established in this space or are you reluctant to call anyone out because you don’t want to alienate anyone that’s still not perhaps quite where you need them to be, be effective? Chris, you want to answer

Chris West:

That one? Yeah, I think any adviser considering something like this, just like when you’re looking as a consultant or model manager undertaking a process in assessing that capability and some of the key things to look for and understanding what’s important to you because it’s not necessarily the case that there is a universally better platform, but there potentially are some areas that are more valuable to you as a practise and your client base and other things that perhaps increase the risk, right, which could be offset by other factors such as cost. So Mike sort of mentioned before something around the operational risk and control environment. It’s quite simple to ask someone how does a change get made? And if that change is digital and it has multiple checks in place and for I checks and make a check functionality with digital authorization within the platform for the manager, that’s a higher control environment that’s going to pass a higher level of due diligence and order requirements at the other end.

Something that requires an of a spreadsheet from a single person, we’d consider that a lower control environment. So just asking the platforms that. The other piece though that’s quite interesting and it really depends on the client experience you’re looking at, some of the platforms will be quite wedded to a relatively standard retail research rating. So they’ll say Anything in this managed account you can have anything you want within these mandate guidelines subject to we being rated by X, y or Z provider. Other platforms will look a little bit more at the substance and look at the due diligence provided by the model manager or the as a consultant and go, well actually we’re going to look at that fund and say, well, you’ve undertaken that due diligence. We can see the risk management you’ve undertaken or that and that might be fit for purpose for these clients.

And that can be quite interesting for firms looking to bring some more institutional style strategies or something that’s in some cases managers who actually aren’t willing to pay to play, right? There are cases of global managers who are in our opinion very high quality who they view it as inappropriate to pay to be rated and so they can actually be incorporated on some of the platforms and some platforms off that functionality, whereas others might go, I want everything to have a retail rating for insurance requirements. So it’s really those sorts of things that things to explore in your due diligence process and offsetting its cost and the adviser and client functionality, they’re just things to consider in the overall mix rather than it being this is the base needs platform and this is,

Mike Parker:

Yeah, I think nuanced is probably the way to describe that. I think Rob, when we engage with clients as a part of that sort of pre onboarding, we just encourage the practise to really think and understand what’s the whole investment experience that we want to generate here for our clients. And that will span everything from asset consultant to underlying managers through to platform, but being really clear in your mind around what are the must haves, what am I not willing to trade away because across the platform universe there is different sort of service offering. So being really clear on your must haves and also clear on the things which you are happy to potentially give away in terms of service.

Rob Pyne:

Yeah, that was going to be my question because you clearly have some experience with the platforms in this space. So the question really is do you help firms as they onboard with you navigate those questions of what’s important to them and which platforms are best served to meet those expectations?

Chris West:

Yes, it’s part of our role to help the adviser make an informed decision if they don’t have a predetermined outcome. But what we don’t do is say, well, we think X platform is better than Y platform. What we try and do if is part of what that advice firm needs, we go, here are the trade-offs, right? Here are the different things you need to consider. Some of those might’ve been obvious, some of these haven’t been considered before. We just bring those to the service and help those advisers make an informed decision.

Rob Pyne:

Do you have any clients that are using an independent RE that isn’t the platform?

Chris West:

Generally our clients haven’t gone down that path except within the platform structure, but we have no adverse consideration of, we think there’s lots of benefits to it, it’s just how it’s played out for us. But we think we mentioned a little bit before that you can use the independent, actually think there’s a governance benefit to it as well, not just the portability across platforms that could also be considered as part of the overall picture.

Mike Parker:

And there is a classic example of what’s important to me in my practise governance. Okay, well I’m going to consider an independent et cetera or multiple platforms. So again, a great pointer to the depths we encourage clients to really go to around their total service offering.

Rob Pyne:

So from what I’ve heard and read, there are only a small handful of platforms that are really gaining a lot of market share out there right now. I’m reluctant to name those names, but are you seeing the consistency of which platforms are being chosen? Is there a bit of a theme for you as well saying, well these are the platforms that when they are going through those gates and thinking about each platforms the best suited, are you seeing a trend there amongst the top two or three platforms that are getting most of the SMA work that you are putting on as well as most of the volume that’s out there in terms of new flows?

Chris West:

I think the way to answer that is in short, yes, and I think some of those platforms that were the newer generation, they have less of a tech deficit and less of legacy system infrastructure to manage and therefore they’ve orientated their offer more towards this. And that’s nothing to be said negatively about any other, it’s about what’s your starting point. If you start from a clean sheet, you’re able to build something for purpose, whereas if you’re building it with some legacy technology in the background, no matter how good you are, you’re then massaging that to make it. So I think that it probably reflects those that centred their offer around it seems to get a larger share of the pie.

Rob Pyne:

Okay, so we’re talking about making a selection of a platform, typically an asset manager perhaps to be the investment solution on that platform. Just walk us through the process with yourselves at Context Capital. How does a firm onboard with you to get an SMA solution? How long does it take typically and what are the initial steps advisers should prepare for?

Chris West:

So I’ll take Rob in terms of how we do it, and this isn’t to say our way is the only way or right way. There’s actually lots of other good ways. So if you took away that is just, I’m actually just going to start using someone’s off the shelf solution. Once you’ve completed the due diligence and you’ve decided X, Y, Z investment company is the partner I want to use and they’ve got off the shelf solutions or something that’s in a hybrid menu where you need to be allowed access from the platform to see it, you can actually just get through that process, start straight away, they might give you some information and training and onboarding on how to use it, recommend the solution, but then it’s kind of done and that’s more of that product offer in those product type solutions. Your onboarding process is going to be generally a little bit simpler and it’s going to be shorter.

Where we work with clients is at the other end, which is at the service end where that’s typically going to be a little more complex and it’s going to take a little bit longer. So how we onboard clients is primarily through a three stage workshop process. We refer to it as discuss debate, decide which is designed to both bring the investment committee of the firm together, but also the key advisers and potentially support staff, potentially compliance staff depending on who’s relevant for the business to actually help design that bespoke solution for the firm. Our process typically will take four to six weeks and then there’ll be a period that the platform needs to go through their due diligence and building process, remembering ultimately there’s a superannuation trustee at the top highly regulated space need to go through their rigour and due diligence, make sure work and they’ll go with three to five months say at a minimum it’s going to take four months to go to work between when you’ve said yes we’re ready to go and it might actually take up to six months to get that ready and investible for your client broken into say four to six weeks from us and then three to five months from the platform depending on the complexity.

And that’s really a great example of the difference between a product solution where you can just choose it like it’s an off the shelf managed fund versus a service solution. We actually need to invest the time and effort to define what you want to achieve for your clients and actually go around building it to gives you real clear contrast there.

Rob Pyne:

So there’s clearly some additional obligations here that advisers need to be prepared for and you’re going to walk them through those things as you onboard them. How do you support advisers in meeting their ongoing obligations in your role as the administrator of the separately managed account? At Context Capital

Chris West:

We view ourselves as the outsourced investment team of the adviser. So rather than us being a manager that’s external, we view ourselves as close to you having your own investment team as you could. So we’re sitting there with the ic, we are providing all the recommendations, we’re providing all the performance monitoring, we’re executing all the transactions, providing follow up on those transactions, providing collateral to the adviser to use with their clients. Any of those things is not unique to us. That’s what all of the good providers will do that. So you’ve got to think about it as being of the standard of someone who’s being approved to manage a superannuation option and therefore everything that’s being provided should be viewed through that lens and a quality that’s required to do that. So that’s going to be stress testing, scenario analysis, it’s going to be risk modelling, it’s going to be ongoing due diligence on all of the underlying holdings.

It’s going to be monitoring of those holdings in isolation, how they’re put together to provide that advice firm with the total picture of how the portfolio is going, it’s set for the right requirements for the different outcomes you want to achieve. Are there any risks in the portfolio that need to be managed? And so I think that’s probably a pretty standard piece there in terms of what’s going to be provided and how it’s going to support the advice business. But also the other side, which is a key part of it as well is helping make sure the story is consistently told to the end client who we’re all here for giving them that trust. How we view this whole process is if you are building that clear investment philosophy, if you are going to have that, you’re promising how you’re going to invest. And so when you’re providing communication and support, it’s all about reinforcing that promise and commitment.

Rob Pyne:

I was going to ask that question because I was thinking about the ongoing communication and the fact you prove our reporting on how the portfolio is tracking and all the collateral you mentioned there, but it was just that question of how you onboard a firm who then has to think about what do we say here when these clients aren’t used to this approach that used to a model portfolios and how do we actually communicate this? Have you given people guidance in that space as to how to actually message this to their clients to help them understand the benefits that it brings to them?

Chris West:

Yeah, absolutely and it’s something that we actually think is really key and particularly in the service model where you have a partner coming in to help you build your portfolio, it’s actually quite critical not to oversell the capability of the external provider because ultimately you’re a client trusts you, right? They’re not there to trust us or any of our peers as a third party. It’s really about communicating to the client about this approach and the additional resourcing you’ve got in place is still about delivering your service and your approach for clients rather than, well we’re just going hands off and outsourcing. That can be a different model, but then that’s in that we’ve decided this is a good product for you. That’s more of a client producing an advice document here, I’ve recommended this product because we’ve done all this due diligence on this product and this is why this is good in the service type model.

It’s really important to keep the advice businesses investment philosophy front and centre as to the why behind you doing it and SMA or any type of managed solution, the provider that’s in place are all there just to service your approach rather than ending up in a situation where you are pointing to the third party because it actually, you can confuse the client, it can create a mixed message. You can actually we think diminish the value, which is completely against the point here’s just about reinforcing and supporting the adviser and not replacing the adviser’s role, which I think is a really key difference.

Rob Pyne:

Yeah, I think it’s a great point actually, as you were just saying that and saying don’t oversell it and make sure people are really, as advisers still presenting themselves as the key relationship that the client should be thinking about and that this is a method we think will work for you for the reasons we can describe, but not to actually position it as being these people have got all the answers and we’re sort of throwing everything in with them. So it’s a very, very valid point to make and I think it’s wise words for people who are considering it to make sure they aren’t positioning themselves in a lesser role in that approach because things change on the investment world and certainly being able to get a client comfortable is just about making sure it’s more business as usual. But there are some advantages I guess is what you’re saying.

Mike Parker:

Yeah, I think alongside who the model partner happens to be, just the mechanical explanation and description decline around SMA as a vehicle, there’s plenty of evidence out there now around as a vehicle the improvements to the investment experience clients can have just through much more effective implementation and much more equitable implementation across an adviser’s client base, right? They can confidently sit in front of their best clients and the client who’s 20th or 30th or further down in the list and they can put their hand on the heart and really know that those clients are going to be treated equally because we have a contemporary investing structure now.

Rob Pyne:

So let’s talk about scale because you can’t go about setting one of these things up when you’ve got no real intent to support it. There has to be a level of scalability or a level of volume I guess is the point I’m making to make one of these viable. Can you give us some perspective on that? So listeners know if they’re thinking about this, what do we need to be having ready to place on these sma? And it might be a model series of two or three or maybe more. So can you give us a perspective on what’s typical in terms of the number of models people are choosing, if there is a typical scenario there and what sort of volume needs to go onto these to make them viable?

Chris West:

Yeah, so what we’d say is that for most of the platforms and most of the model manager space, you’re looking at a situation of groups looking at three to five portfolios and looking for a minimum of about a hundred million. There’s certain situations in certain parties who have a higher threshold, there might be two or 300 and sometimes they’ll have more complex model structures, some might have 10, 12, 15. We have a wide variety from sort of one to the teens reflecting our service approach where we design it for clients. Others might be a bit narrow in their range, but generally the scale requirement from advice practise to have a service style model is about a hundred million on most platforms, and that’s not a hundred million on day one. That’s a hundred million potentially over a 12 to 18 month period is pretty much the market standard. That doesn’t mean you can’t choose someone’s off the shelf solution with the lower scale amount there. There’s lots of really good off the shelf solutions out there and someone could choose that just with just bringing their new clients in or different clients in just the next client. You just go on a platform, there’s a number of really high quality off the shelf solutions there that you can go and choose that may be fit for purpose for a client. Do

Rob Pyne:

You see then people perhaps taking that path, Chris, sometimes maybe making a migration effectively starting with an off the shelf solution and perhaps, or maybe Mike you can answer this one, do they migrate towards their own solution after they’ve perhaps been starting with an off the shelf solution?

Mike Parker:

Yeah, it’s quite a common trend we’re seeing at the moment Rob. So a professionalised boutique, it made the move to off the shelf solutions say four or five years ago built a significant kind of scale in that side of their business, but now denture in a world where they’ve lost a bit of connection to the investment portfolio. So once when they might’ve been running their own models, they were sort of intimately involved in the forward facing investment decision making components by nature of moving to something off the shelf, they’re always going to be finding out about moves shortly thereafter that the model manager has made those. So we are certainly seeing opportunities present themselves to us where adviser or the practise is saying, boy, you know what? When we’re sitting across the table eye to eye to closing, I used to know why all of these managers were sitting in the portfolio and the role that they were performing and I was very comfortable being able to explain why one might’ve been outperforming and another might’ve been so-called underperforming. So yeah, definitely a trend is emerging now where those circumstances, those practises are looking for a solution where they can be back involved in that forward facing decision-making of the portfolios. And one of the beauties of a managed account sort of structure is the portability. You are able to, in Specy assets, you are able to appoint a new model manager to your portfolios. So without realising CGT for clients,

Rob Pyne:

Is it perhaps driven by that sort of people moving back and wanting to be more in connection with what they’re recommending on the investment side? Is that a retention style motivation there? I mean in terms of client retention, are they feeling like they want to have that conversation, they feel like the clients are expecting that from them, and is that part of the solution that advisers are looking for So they get that stronger sense of connection with the investments and the clients feel like, I couldn’t replace that. My adviser knows this stuff and I don’t.

Mike Parker:

Yeah, for me, my thoughts on that is it’s one of just continuing to reinforce that practise identity in the market and typically these are professionalised they practises that have gone down this path and they are very clear in their mind around our position, they’ve got a great sort of value proposition and they’re now actually seeing a pathway, a much clearer pathway to being able to bring their value proposition and make that real live and breathing within their investment portfolios.

Rob Pyne:

Is there any research out there around how this is not just helping efficiency and the like, but in terms of that client engagement, is there anything people are saying there in that space around well clients feel more engaged because I get that visibility and transparency of the underlying investments. Is there anything that you can point to say, well, it’s not just about efficiency and fairness, but the evidence after the fact is that they’re more engaged and therefore retention is better for advisers with this sort of portfolio?

Mike Parker:

Yeah, well I’ll send you a link perhaps to attach to this podcast, but there’s some pretty clear evidence now around the higher levels of engagement that firms that have embarked upon an SMA with their clients, I think it’s upwards of 65% of those practises are reporting higher levels of client engagement. It’s almost 90% of advisers using a managed account structure reporting much more time spent with clients. And again, from a business metrics point of view, success leaves clues here. I think it’s some business health research, forgive me if that’s wrong when I send through the link, but there’s some clear markers around higher revenue per client for managed account using practises versus non-users and we’re talking about a factor of almost three times. So an average revenue of a bit over $3,000 for non-managed account using practises to close to nine and a half thousand dollars of revenue per client with those practises who are using a managed account structure.

Rob Pyne:

Yeah, I look forward to seeing that and we’ll put that in the show notes. I am certainly very curious about that because I wonder how much of it is about the client feeling more connected and engaged with the underlying investments. And I wonder how much of it is a factor that the adviser now has more time to engage with the client. There’s actually less of them to be thinking about setting an ROA and I guess there’s less impediments for them to sit in front of clients and have more meaningful conversations because they’re worried about the paperwork that’ll flow from that. So I’m very keen to see that research and we’ll put that in the show notes for others to have a look at too, because retention is a clear, strong attraction to any adviser. It’s not just about how do we win new clients, but how do we keep those clients we already have and make them feel more connected to what they’re doing with their adviser.

It’s something that we’re always paying attention to our attention stats because if we’re not delivering something that people feel they want to continue to pay for, you get that high attrition. So yeah, I’m keen to look at that one for sure. So you’ve given us a really good understanding of the volume, the reasons, the opportunities, the responsibilities rather than challenges we’ll call it. And so a quick recap before I ask you a final question. So Context Capital really are agnostic about the platform you are seeing constantly the platforms that are regularly being used because they’re more contemporary platforms that don’t have their technology deficit, they are ready to adapt to the new world of SMA being a very common solution for advice firms. You are looking at starting positions of maybe a hundred million dollars across series. So it could be a two or three or four models, but across series a hundred billion dollars is kind of the starting gate.

But people may in fact start doing that old off the shelf solution and they get to a point thinking, we ready to take a bit more ownership over this and then migrate their clients from an off the shelf solution to their own bespoke solution, whether it be an asset consultant, whether it be an investment manager that they’re very connected to and close to. So clearly you are building a business around meeting the needs of those advice firms that have a pre-ordained idea about what they do and what they do well and how they can deliver this solution. Do you want to add anything I’ve not covered there in that recap before I ask my final question? Chris, have you got anything that I haven’t said there?

Chris West:

I think the number one thing that we probably think people should sit back and check is there’s nothing wrong with choosing and selecting an off the shelf solution. I think there’s probably, in our experience there’s a little bit of a run to our type of model and not all the time that is the right approach. There’s actually plenty of situations out there where having two or three managed accounts on an A PL and actually saying, I’m going to choose between X provider, Y provider and Z provider. That can actually be a better solution. You may actually be much better for the practise and we think you should go through that process of, and we actually do this, we do an UNSELLING process before we get to our onboarding workshop to try and really make sure like advisers would do with their clients, am I a good fit for you? Because we all want to deliver really high quality service and have really high retention and deliver great experience. So you really need to be clear about what you’re getting into. And there’s lots of benefits that we’ve talked about, but we really think something that people should go through is that here’s why I shouldn’t do this and am I comfortable with that before proceeding

Rob Pyne:

That Unselling is not reverse psychology. Chris, you’re actually not using it as a technique I gather from way you’ve just described that it’s a very authentic no, we need to make sure that you’ve thought everything through and I’m going to walk you through all these decision points and if you are unsure about the reasons why you would continue at any of those points, we are going to encourage you to think very clearly and carefully about why you would continue. So when you have then a firm on board with Context Capital, you are very confident that they’ve given all the right considerations to that decision and they’re likely to be a very sticky proposition for you as well.

Mike Parker:

I’d sort of characterise our relationship with context clients is quite a narrow set of very deep relationships, which is fundamentally different to sort of many in the marketplace who will seek to have an offering that’s available for many advisers and adviser practises but won’t have the same degree of what we would call depth to the relationship. So that’s how we would characterise that.

Rob Pyne:

And so I’ve got two final questions. The second last one then is, so it’s firms that really are growing that have higher growth potential that you are looking to connect closely with and have those deep relationships with Mike that you’ve just described because ultimately you’re in this business to build assets under management too. And so you are looking for firms that have not only the a hundred million dollars starting position, but in fact have high growth capability to continue to grow their assets under management that you’ll be helping them support them with.

Chris West:

So I think something we all should always remember is we are in financial services and so we’re all in a really privileged position to start with and So our approach, and we’re quite lucky that on this podcast you’re talking to two of the owners and we’ve got other owners context. And I do put a shout out to podcast, one of the trusted adviser that is helping us with our own employee share scheme to sort of bring in some of our other team members. So we’re sort of owned by us, and so we can make our own decisions. And in financial services, we are really fortunate about the financial position that puts ourselves in. And so for us, the decision making probably isn’t quite about the size of the opportunity or the growth prospects of the firm. It actually probably comes down to some other factors.

Obviously there’s a commercial minimum viable approach. And then once you’re at that minimum viable approach, really for us it’s more about do you have an identity and you want to express that identity with your own involvement. So that can be, I’m happy to delegate to context everything within my clear approach on my website. This is how I describe investing, this is how I want it done. My clients are comfortable with this. Whatever solution I’ve got, I want that to be meeting that. That can be fine, or you can actually want to be involved on a weekly basis talking to some of our team. So it’s more about I want my identity and involvement. We think we’re going to give you a good experience then. And then secondly, do we want to pick up the phone and we ask our team in sales meetings or engagement processes, whether we’re involved or not, do you want to pick up that phone to that advice team?

And not just the advice principle, but the full team? Because if we’re going to deliver an absolutely excellent experience to help our clients feel like we’re part of that team, you need to want to talk to them. And that’s what happens with our clients where you go, oh yeah, they’re calling. I’ll pick up the phone. Right? The thing you can’t possibly have in this business is a situation where you have some call and you go, oh, I have to talk to them. No, no, I want to talk to ’em. Because obviously you’re going to give that 1% extra, that 10% extra if you care about the other person’s success, you care about their clients. If it feels like a burden, don’t do it. And so what that means is our preferencing of clients is more about people who have that identity and clear investment philosophy, however that’s been derived in the past. There’s a wide range of ways that could have come about. And secondly, do we really feel connected and want to put in those extra effort because life’s too short, otherwise life’s too short to worry about just chasing the maximum financial opportunity. We’re all in financial services. It’s going to be commercial. Make sure you want involvement and your own approach. And do you want to pick up the phone?

Mike Parker:

Well, Paul, Chris, a couple of things I’d add to that is typically we’re engaging with firms who are thinking about how do I be more equitable with my clients? How am I more effectively implementing our best investment ideas? How do we express our position in the market? They’re sort of characteristics of businesses that are growing organically out there in the world. So I think we naturally sort of select for that type of business. And maybe further to Chris’s point, we’re not here to grow our business, scale, our business infinitely. So there comes a point where we’re very happy to share and cap our fees. So end client of financial planning practise can start to enjoy the benefits of that practice’s growing scale. So we’ve spoken a lot about investing philosophy today. There’s a little window, I guess into the philosophies that sit behind context.

Rob Pyne:

Yeah, I love that. In fact, I’ll just refer to one of our core values is relationships over transactions. It’s how we operate every decision with professional partners, with our clients, with our team. A transaction is really needing something from someone. A relationship is about how do we get this done together? So we really understand and lean right into that point that you’ve just made there about it’s relationships first. And you want to feel like you’re working with people that you want to work with, that you spend time with people that you actually would socialise with the same people that you’re working collaboratively with to get the right outcome for your end clients. So I love that. And thanks for the shout out on episode one on the employee share plan. I’m glad that’s helping. So final question, guys, here it is. Future of SMAs. What trends or regulatory changes are you seeing in the SMA market and how do you see the role of SMA evolving over the next few years?

Chris West:

So I think from my perspective, Rob, a lot of the founding team have come from a highly regulated background and across our team we’ve got lots of people who spend lots of time working in upper regulated environments. I think the key is as you move to a market or subset of the market that is becoming increasingly responsible in aggregate for large amounts of people’s savings and retirement savings, you can only expect that the regulation and attention that’s going to be placed on that space is going to increase. It’s going to become more and more like the superannuation industry’s level of regulation. What happens to insurers as well? There’s lots of regulation, presidential regulation that’s out there. I think there’s going to be a convergence where the standards that are expected, the performance measurement, however that plays out, is going to be more consistent with what you’ve seen happen in the superannuation space more broadly.

And you’re just going to see that increase. I think it’s really good that there are lots of options for advisers in terms of partners like us, but also the platform offers. I think to me, that’s only a good thing about the competition and innovation that’s happening. Some of our peers have really high quality technology innovations that we might not have today, but what you’re seeing is that consistent innovation and idea generation about how to service the adviser, how to service the end client, how to deliver better outcomes. I think if I are going to summarise, I say it’s going to be more regulated rather than less regulated. And secondly, I think the fact that it’s become quite a competitive space is a good and healthy thing to help advisers in the end client get a better outcome. Exactly what the structure of the industry looks like. I don’t know, but I can see competition driving good outcomes for the end investor, which is only a good thing.

Rob Pyne:

Yeah. I’ll just reflect on the fact that for someone who’s got a business out there looking to win in a competitive landscape, you offer a very balanced view and mature outlook on how you want to build your business there. Chris, I appreciate that because it is a competitive landscape both in the advice world and in the world that you operate in with separately managed accounts. So I thank you both Chris West and Mike Parker today for joining us and talking everything SMAs on The Trusted Adviser Podcast. Thanks guys. Thanks, Rob. Thanks for having us. Thanks heaps.

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