Dealer groups should be aware of the potential risks and complexities associated with creating in-house investment products, according to financial services firm Paragem.
Paragem managing director Ian Knox said an increasing number of financial planning firms were seeking to become their clients’ own money manager in response to the flat market and Future of Financial Advice reforms, which could see volume rebates abolished.
“I think it is quite a common occurrence as dealer heads are looking to find a way of securing revenue,” Knox said.
“The issues associated with going into managing your own product in one form or another, whether it is managed discretionary accounts or a white-label arrangement, requires someone within the dealer network to have substantial governance competencies and experience in managing products.
“It also requires operational experience; generally speaking a variety of competencies that typically aren’t found in an advice business, so there is obviously a risk that the skill set isn’t there.”
He said dealer groups would also need to manage the conflict of interest associated with channelling clients’ money into in-house investments.
“All of the issues that a research house would appraise a fund manager for which is staff turnover, staff competence, skill set, governance, income security – all the issues prevalent in looking after a retail investment come closer into the adviser’s practice,” he said.
He said dealer groups should ensure they had the right expertise and recruit additional people or outsource to fill any gaps at the investment, compliance and governance levels.
Dixon Advisory managing director of funds management Alex MacLachlan agreed the model posed potential conflicts, but the key was to manage them.
“We do it by having independent boards, simplicity, full transparency, low fees, demonstrated commitment to active capital management and shareholder/investor votes for all key decisions,” MacLachlan said.
“In fact, you could argue our structures are more investor friendly than the traditional managed fund structure, where investors have no rights other than getting out of the investment. Our funds are also all independently audited by top-tier audit firms.”
Addwealth chief executive Paul Foster said the dealer group outsourced elements that it believed should be handled by others, especially where it could reduce conflicts of interest, including custodianship, responsible entity, fund accounting and registry and auditing.
Foster also said running an in-house fund was not for everyone.
“You can’t hide from the results. Once you have your own product there is no-one else to blame, so if you aren’t sure you can do a good job, you are going to hate the stress of constant judgment,” he said.
Henderson Maxwell chief executive Sam Henderson said the dealer group had put strong processes in place to manage its clients’ money.
“We have been managing our clients’ money through managed accounts for over three years. We have all of the processes a fund manager would have, if not more,” Henderson said.
“We have an investment committee that meets on a monthly basis and a written investment options document, which documents what we do and what our philosophy is. We have a certain mandate that we adhere to and risk management is all we do.
“And we also use Finmetrica to do risk profiling of our clients and so the portfolios fall in line with that risk profiling tool.”
