Implementing Goals Based Investing in your Financial Planning Business – Part 2

Part 1 of this article examines why advisors are increasingly moving to outsource the investment function of their financial planning business when implementing a goals based investing approach. The next step is to consider a suitable investment and administrative structure that will support the advisor in delivering the key objective of goals based investing; tailoring each client’s portfolio to ensure it meets their unique objectives.

Advisers require a solution that is scalable across the entire client base, yet flexible enough to allow clients’ capital to be professionally managed using a dynamic asset allocation (DAA) approach; this is an important aspect of achieving the target returns of each client’s goals within set time frames, while also managing volatility.

The commonly available legal structures that can meet these needs include unit trusts, separately managed accounts (SMA) and managed discretionary accounts (MDA). These can be used for both investment and superannuation capital.

The most common legal structure adopted by managed funds is a Unit Trust, in which the investor purchases a certain number of units from the trust and in which the manager then invests the capital accordingly. This offers scalability, as changes can be made across all unit-trust holders simultaneously. Advisors can also allocate a client’s assets across a number of different unit trusts to meet various goals.

Most unit trusts available in the retail Australian market operate to more traditional risk profile or SAA mandates, with little scope for variation to asset allocation parameters to suit different market conditions. This means most unit trusts do not provide true-to-label dynamic asset allocation, as the investment manager does not have the ability to invest outside the scope of the PDS. Unit trusts also offer limited transparency, with investors often only being privy to top-level information that is usually provided quarterly.  Another drawback of unit trusts is the lack of tax efficiency, as unit holders are taxed on their share of the trust’s income and do not have the capacity to make adjustments to suit their personal circumstances.

SMAs are also considered to be financial products that require the issuance of a PDS, but rather than pooling investors’ assets, each investor has their own separate account and is the beneficial owner of the assets. This allows investors to better-manage the tax consequences of their investments. Another benefit of SMAs over unit trusts is superior transparency, since investors can view their holdings as well as any transactions and fees that affect their account. The challenge with the SMA structure is the ability of an advice firm to get scale and timeliness of execution across all clients accounts, as they are typically managed separately, as the name suggests. This can be cumbersome and costly – for both the client and the advice firm – if there is a need to change the underlying investments to better suit market conditions as they change.

The third legal structure being discussed in this paper – MDAs – offers the tax efficiency and transparency of SMAs, as the investor is the beneficial owner of the assets, but as they are managed under a discretionary authority changes can be made in a timely and effective manner should circumstances require it. This inherent flexibility makes it scalable across an advice business whilst also providing the transparency clients desire and efficiency in helping manage costs for both the advice firm and the client.

In our opinion, this makes MDAs the most suitable structure and administration framework for financial advice firms that wish to employ goals based investing under a DAA framework.

Find out more about how MDAs facilitate the implementation of an effective goals based investing solution, contact Dynamic Asset today.

Check out Part 1 of this article here.

Guide to Managed Accounts