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Liz Koh: Model portfolios “inevitable”

Good Returns chats to Liz Koh about how the future of financial advice could be centred around model portfolios.

Wednesday, September 30th 2020, 6:00AM 11 Comments

by Daniel Smith

Liz Koh, the founder of Moneymax and the director of Enrich Retirement has told Good Returns that model portfolios are an “inevitable” industry shift.

“Advisers don’t really add a lot of value in terms of portfolio construction. That side of things is best left to the technical experts who can focus on asset allocation, stock selection and that sort of thing.”

Koh went on to say that by leaving the technical aspects of portfolio construction to a model portfolio system allows the adviser to focus on the customer facing aspects of their roles. Advisers will understand their clients' goals, then be able to access a range of model portfolios so that they can best align with their client’s long-term strategy.

The model portfolio system is not just recommended by Koh to individual advisers, but to have the potential to change the shape of the industry as a whole, “It simplifies everything from an administrative point of view. It’s also much more cost-effective to have model portfolios than customised portfolios. It cuts down the paperwork. Takes away the risk for the adviser to make bad choices for their client.”

Koh believes that advisers still have a central role to play, in the asset allocation of their clients' wealth. “At the end of the day, investment returns are determined more by asset allocation than by selection of product. So that’s where the emphasis needs to be. The asset allocation is the borderline between what the financial adviser does and what the portfolio constructor does. Anything beyond asset allocation, it’s much more efficient for everybody if that’s done on a centralised basis.”

Tags: Model portfolios

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Comments from our readers

On 30 September 2020 at 8:59 am Pragmatic said:
What a load of rubbish. Whilst model portfolios do have their place, and can be a useful starting point, to state that they are "an “inevitable” industry shift" is misleading & incorrect.
I would argue that advisers add significant value in customising a portfolio solution that reflects their client's unique situation... ask any successful financial adviser!
On 30 September 2020 at 10:47 am John Milner said:
Pragmatic, I couldn’t disagree with you more. When the majority of fund managers fail to add value over and above the market, it is highly unlikely an adviser can do so. My experience working with advisers around the world is, they simply don’t on average. And if they did, it could be attributed to either random short term luck or additional risk.
The only change to create this “inevitable” market shift, is accountability through new legs and regs. The curtain has been raised on the emperor’s new clothes. Or lack of.
On 30 September 2020 at 12:24 pm Interested AFA said:
Totally agree with Liz.
@Pragmatic, I'm interested to know what you mean by 'customizing a portfolio solution that reflects their clients unique situation ...'.
Are clients really that different? Surely they all want a fair return relative to the risks they are prepared to take.
Does a clients 'unique situation' really warrant an Adviser - who (when all is said and done, lets be honest) is on balance nowhere near as technically savvy as a Fund Manager - tinkering around and customizing a portfolio, whilst charging the client a higher fee for the privilege?
When a client could otherwise be allocated a 'Balanced', 'Balanced Growth' or 'Growth Portfolio'.
Does this add value - really?

I'm interested, especially since we are only supposed to give advice in areas where we have the skill, knowledge and expertise to do so.
Sounds like a high risk strategy to me - from both the clients and the Advisers perspective.
I am deliberately playing devils advocate here, but would genuinely be interested in others views on this.
On 30 September 2020 at 4:44 pm Pragmatic said:
Whilst it’s embarrassing to be stating the obvious after 30 years of the industry gagging to be thought of as a profession, sadly the perspectives shared in the article and some of the bloggers are symbiotic of an industry that has become complacent, lazy and myopic.

Let me attempt to express my perspective through the lens of the consumer – you know; the people that you request an annual payment from to service their financial requirements.

Firstly let’s assume I’m a client who has approached a financial adviser who has gathered information and presented me with a set-and-forget “all weather” investment portfolio. Their argument (aka John Milner) is that “the majority of fund managers fail to add value over and above the market” – a statement that is both incorrect and suggests that this adviser is unable/unwilling to add value to my portfolio going forward. And yet, there are plenty of these sorts of advisers whose relationship-fees have been disguised amongst double-digit portfolio returns… much of which has been fuelled by 3 decades of falling interest rates. With most forecasters acknowledging that the rate falling environment is closer to the end than beginning, all industry participants will need to demonstrate how they add value to be able to receive their fees. Sadly, these set-and-forget approaches will be difficult (impossible???) to differentiate amongst the community of advisers who choose to provide homogenous model portfolios.

Let’s have a look my comment “customizing a portfolio solution that reflects their client’s unique situation” – which is exactly what the Regulator expects from the industry. Every client is unique, requiring an investment solution that matches their risk, expectations, objectives etc. Machines can easily provide cooker-cutter approaches for much less expense – and yet, robo-advice still struggles to gain meaningful traction in even the most mature of financial services industries. Why – because consumers are prepared to pay a premium for a tailored solution. That is not to say that models are not a useful starting point… albeit that advisers are in exactly the right place to understand the most appropriate tilts, weightings, risk profiles that match the portfolio with the client’s circumstances.

And finally (so much more that could be said...), I’ll end my ramble by strongly encouraging financial advisers – especially those who:
a). are unable/unwilling to add value to their client’s portfolios on an ongoing basis
b). believe that portfolios constructed under the veil of Modern Portfolio Theory will deliver superior risk-adjusted performance going forward
c). Prefer index/index-like capabilities - as these help to quarantine their own fees
d). believe that clients will continue to pay 50bps+pa for mediocrity (especially in a society where there is low superannuation and tax complexity)
…to reflect on other industries that once enjoyed relationship-payments for delivering mediocrity, until such a time that consumers demanded value for money (hint: think travel).
On 30 September 2020 at 4:52 pm Murray Weatherston said:
If "model portfolios" are the answer, the follow-up question is "Whose model portfolios?
And if I take this to the extreme, why doesn't the source of all truth (The Governemnt of the day perchance?) simply chose a single "model portfolio" and mandate all investors to follow it.
No need to have active fund managers, nor advisers.
Just make the model portfol-ier publish the mandated asset allocation and let businesses scrap over who can deliver it at the cheapest cost.
Lordy, this stuff's so easy if you just believe.
Or have I truly taken leave of my senses finally?
On 1 October 2020 at 10:49 am John Milner said:
Nice try Pragmatic. Just love those willing to make bold statements with little to no evidence. And of course no name given.
On 2 October 2020 at 3:45 pm I’m not convinced... said:
Fundamentally I think Pragmatics view of what the 'profession' is perhaps a large part of the problem as to why we struggle as an industry to build credibility. There are too many advisers that want to 'play' investment manager...rather than adviser...

A good example is to look at the direct bonds that make there way into the fixed interest allocations of many client portfolios, i.e. 80% or more unrated or bank sub-debt - that's not 'customising a portfolio solution that reflects their clients unique situation''s frightening and shows why advisers shouldn't be investment managers. And don't get me started on advisers that used finance companies...and then blamed the finance companies for the client outcome...

Recommending a solution that is unique to a client's needs does not require portfolio construction in the way the industry has historically interpreted this. That approach leads to clients confusing good advice with investment management and return outcomes - yes, not mutually exclusive but having clients focused on returns (through suggesting you can achieve superior returns) is likely to lead to short-term emotional decisions from clients rather than a more fundamental consideration, e.g. confidence they still on track to achieve their goals.

As an industry we need to flip the conversation away from returns to be one that is first and foremost about advice and the probability of achieving goals. Asset/liability matching through the use of models (or even more simply multi-asset class funds for smaller balances) will deliver good client outcomes without suggesting advisers have the the time (or the appropriate skills) to be an investment managers - let's focus our attention on being advisers in the simplest and purest sense of the term.
On 4 October 2020 at 10:18 am Pragmatic said:
Thanks for your comments "I'm Not Convinced". I don't actually disagree with your scenario - whereby advisers are getting caught up with the granularity of stock selection... In my experience, selecting individual stocks is a full time skillset, and beyond the ability of most advisers.

My perspective involves advisers crafting appropriate portfolios using a selection of active, passive, funds & ETFs. The outcome should be portfolios that best represent the client's objectives etc.

Let me provide an example of what not to do: At least one of the commentators to this discussion has $10m of clients funds invested via an institutional balanced fund, and continues to charge their clients 120bps each year for the privilege. For what????
On 5 October 2020 at 2:26 pm Graeme Tee said:
Hi Murray

No you have not taken leave of your senses. You have just described the banks’ investment strategy as mandated by the FMA.
On 6 October 2020 at 7:39 am indy said:
Wow - Pragmatic are you saying someone is charging $120K p.a. on a $10m portfolio?? I would be very interested to hear how that could be justified....
On 6 October 2020 at 10:13 am Contrarian said:
That's one sure way to get free publicity...!

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