Martin Dobson of Avenue Capital Management explains the various investment options and considerations for financial advisers during the process of creating suitable portfolios for their clients.
Date: Nov 2010
Tags: Research, Asset allocation, Portfolio construction, Suitability, Wrap platform
Although the concept of a research house is not very common outside Australia, they exist in the local wealth management space as independent organisations to provide research across a broad range of investments, explained Martin Dobson in an interview.
They then market and sell these services to financial planning houses or various licencees.
This is key, he said, since many financial planners cannot provide advice on products which aren’t on their approved product list – a list which generally comes via a research house.
In particular, the research houses provide both quantitative and qualitative analysis, said Dobson. On the qualitative side, this means looking at who is running the investment, what they like, and their track record. On the quantitative side, this means looking at the investment itself.
Determining the product mix
When creating a portfolio for a client, Dobson said asset allocation has been shown to be a key component of the process, with around 90% of the end-game being achieved by getting the allocation right. Within that, he said there is not much difference between many investment managers.
Some research houses set up prescribed investments according to certain asset allocations, said Dobson.
To do this, they look at various metrics to see how different managers will fulfill what investors want to achieve.
One of these tools is a correlation matrix to ensure there are no two managers in a portfolio which are alike.
According to Dobson, a reason to have these prescribed investments is that certain financial planning groups feel that it is not their expertise to choose a manager. As a result, they are happy to outsource this process to the research house.
In turn, licencees are comfortable with this approach, he explained, because they know the planner is only using approved products to fulfill what the customer wants to achieve, based on risk profiles, and generally only using those products which are highly rated.
The role of wrap platforms
Wrap platforms, which are essentially a consolidated administration service, also play a key role within the investment and portfolio construction processes in wealth management in Australia.
These platforms are like one-stop-shops, he explained, paying an administration fee to the platform providers and offering a wide range of investments – hundreds in some cases – across all asset classes, from term deposits through to various types of hedge funds.
A wrap platform is also a sophisticated reporting tool for all financial information, said Dobson, with reports able to be modified to meet certain requirements of individual advisers.
It is also a consolidated tax-reporting tool, he added, which is a useful function for many clients on the investment side.
Wrap platforms also run under a trust arrangement, said Dobson, and if clients move assets within these structures it can be beneficial for clients from a tax perspective.
On the flipside, the major banks own wrap platform systems. While this provides them with an instant opportunity via a product distribution service, they stress that they don’t intend to sell their own products.
