CASE STUDY. Setting Up a Managed Account Driven Practice

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1 CASE STUDY Setting Up a Managed Account Driven Practice Our Objective Highlight why managed accounts are not just another product they truly integrate advice and administration Highlight how managed accounts can be used in delivering equities advice to clients Highlight the value managed accounts can add to a practice both financially and commercially

2 Managed Accounts are not all the same Investment Administration Services is a MDA Operator and Administrator over $400 million in managed accounts Enabler for dealers, brokers, investment managers and other licensed entities to create their own Managed Account Service Dealer as investment manager approach, Investment Manager model approach or an institutional model ie. range of models and managers What does Dealer as Investment Manager Mean Dealer can be appointed as an Investment Manager without the need for the dealer to have an MDA license Own portfolio construction or mandated portfolios (dealer branded portfolios run by dealer selected specialist investment managers) or a combination of both Asset class models, models across the asset classes or specialist models

3 Introducing Sam Henderson Master of Commerce (Financial Planning) (progress) Bachelor Degree Commerce (Accounting) Diploma of Financial Services (FP) Advanced Diploma Financial Services (FP) Advanced Diploma Marketing Management Securitor New Financial Adviser of the Year 2004 Accredited Mortgage Consultant (AMC) Specialist in retirement & self managed super Who is Henderson Maxwell? An award-winning, independently-owned, feefor-service boutique financial planning firm Offices in Sydney and Melbourne, 8 staff with $130m FUM Cater to higher HNWs and businesses, including SMSF s more than $500,000 to invest Specialise in both retirement and super superannuation strategies

4 Managing our client s money what have been the choices? Wrap with wholesale funds and shares Retail Master trust (same thing but more expensive) Retail funds using Xplan/ COIN back end admin Direct shares via broker (maybe Praemium back end) The problems with using these choices Every client has different shares and funds No rationalisation of the investment process Admin heavy from SoA to review What if you want to sell ABS across the client base?

5 Issues with the industry Supply chain is heavily influenced one might say structurally corrupt Commission focused not fee focused Product focused and not strategy focused Recurring revenue focused not profit focused Businesses poorly systemised and managed Dealer groups charging a fortune and not giving much back Issues with the industry Fee compression occurring - don t give up your margin! Managed Funds consistently underperforming benchmark Many of these are opportunities for you to obtain business from institutions via strategy based advice and innovation in product

6 So if 80% of managed funds under-perform the index why keep trying and why pay a premiumstop kidding yourselves! To date we have had to be set and forget!!! Major Wrap Service Poor managed fund templating (limited MDA) and cash management Negligent use and understanding of shares- trading, corp actions/ divs Average client fee of 0.55% on ewrap and much higher on MT Average fee of 0.9% on wholesale managed funds Poor cash account rates Retail Clunky, inefficient and impossible to administer Direct fee for service We have had no control or MDA capability

7 And platforms... If they can t do what you want and your clients are paying a premium, then why keep using it? Dealer Group? Volume Bonuses? Love of managed funds and the traditional supply chain? The supply chain problem Service Deliver/ Cost to Advice Product Platform TOTAL Client Pays 0.88% 0.99% 0.55% 2.42% YOU 0.88% 0.00% 0.22%(VB) 1.10% Difference 1.32% Where is it going and are you and your clients getting value?

8 Increase revenue by 50% and profit by 100% Who has increased revenue in the past 12 months? At Henderson Maxwell, our revenue has increased in the past 12 months Profit up EBIT % up Clients happier Better returns Lower fees How Through Using A Managed Account Henderson Maxwell definition of an SMA/IMA? IMA - Individually managed account is a, non-templated, individual client account via an MDA that you can manage on a single platform SMA - Separately Managed Account is a group of client accounts that you manage via an MDA structure using portfolio templates MDA - Managed Discretionary Account - requires a separate and specialist AFSL usually carried by the provider (eg IAS) and for adviser to provide Investment Options document is required as well as a client contract. Gives dealer investment management capability to change account with dealer discretion without providing further advice to the client via an SoA/ SoAA - saves significant paperwork IDPS - Investor Directed Portfolio Service - Investor directs portfolio manager to manage account at their discretion - like a fund - a PDS is required

9 What is your expertise? Model portfolio - a portfolio using someone else s investment models cost % + platform costs Custom portfolios - your own portfolios constructed in-house small additional cost. You manage and make decisions Individual portfolio - for HNW and high maintenance clients. You manage and make decisions at yours and the client s discretion How does a Managed Account actually work? Before: Each individual account on a wrap platform No MDA Changed after a review and SoA/ SoAA or client Eg sell out of ABS would take 3-4 days for all clients incl RoFA Now: Just like a wrap but better Can sell down across the client base in seconds No administration One staff member - 5 minutes work No meeting with client, no SoA docs for changes Better management, more efficient, responsive to market

10 So how did we transition to IAS? 1. Problem identification 2. Due Diligence on possible solutions 3. Own AFSL- intended anyway 4. Choice of supplier 5. Due diligence on Henderson Maxwell and agreements 6. Investment Committee and Investment Charter So, how did we transition to IAS? 7. Portfolio selection, Service definition and finalisation of Investment Options documentation 8. Client migration - Marketing and SoA/ SoAA compliance 9. Rollover process and implementation 10.Client management process and ironing out minor issues 11.Ongoing assessment and improvement eg. Coin datafeed, electronic application, online transactions

11 Advice delivery Questionnaire and Finametrica risk profile 1st Appt- Client presentation on Managed Accounts and benefits SoA Production and compliance, switching rules and disclosures SoA presentation Investment Options document, Managed Accounts client contract, IAS FSG, PDSs SMSF set-up - ABN/ TFN, account set-up Client management and fulfillment Client review process - print desired reports How do we manage client s money? 5 Step Process for the Henderson Maxwell Investment Committee 1. Global Economic Themes 2. Asset allocation 3. Sector analysis 4. Stock Analysis 5. Stock and Fund Selection, weighting & transacting

12 Research inputs Internal & Consultants Research Aegis Huntley s StockVal Farrelly s Lincoln Eureka report Portfolio construction Portfolio/ Asset Allocation Fixed Interest Conservative Balanced + Ethical Balanced Growth Cash 30-50% % 5-100% 5-100% Fixed Interest 50-70% 30-90% 10-50% 5-30% Aust Property 0% 0-20% 0-20% 0-20% Aust Shares 0% 0-50% 0-50% 0-70% Int Shares 0% 0-20% 0-20% 0-30%

13 Sample portfolio Henderson Maxwell Recommended Conservative Portfolio as at 31 Jan 2009 Australian Shares Share ASX Code Floating Weight at 31/1/09 Caltex CTX 0.14% Woodside WPL 0.34% WorleyParsons WOR 0.12% BHP Billiton BHP 2.23% Incitec Pivot IPL 0.31% Lihir Gold LGL 0.12% Newcrest Mining NCM 0.27% Gold Bullion Securities GOLD 0.29% OZ Minerals OZL 0.10% RIO Tinto RIO 0.42% Ausenco AAX 0.04% Austal ASB 0.16% Leighton Holdings LEI 0.35% Brambles BXB 0.53% Toll Holdings TOL 0.26% Billabong International BBG 0.26% Crown CWN 0.22% Invocare IVC 0.30% News Corp NWS 0.15% Metcash MTS 0.22% Woolworths WOW 1.49% Sample portfolio Total Direct Australian Shares 20.53% SSGA SPDR S&P/ASX 200 ETF Fund STW 1.27% Total Australian Shares 21.81% Property Securities ASX Code Weight Stockland SGP 0.29% Mirvac Group MGR 0.24% Westfield Group WDC 0.98% Total Direct Property Securities 1.50% SSGA SPDR S&P/ASX 200 Listed Property ETF Fund SLF 0.00% Total Property Securities 1.50% International Shares ASX Code Weight ishares S&P 500 IVV 1.04% ishares S&P Global 100 IOO 0.00% Total International Shares 1.04% Fixed Income/Debt Securities ASX Code Weight Macquarie CPS MQCPA 5.45% Vanguard Australian Fixed Interest Index Fund VAFI 53.47% Total Fixed Income/Debt Securities 58.92% Cash Weight Cash - ANZ Account 4.25% less 0.35% = 3.90%) 16.73% Total Cash 16.73% Total Portfolio % Benchmark Return Value Add

14 Industry pressures? Fee compression is real - don t let your margin get squeezed! Clients questioning the supply chain - vertically integrate and own your clients from go to wo Product rationalisation- active vs Index Adviser needs to add value via product AND service Own your client and take back your business!! The CLINCHER! By using a managed account; Clients save around 0.5% on average Business increases revenue by 50% and profit by 100% - it s a true win-win YOU have total control of the supply chain Increased fees through investment management fees, brokerage and performance fees

15 Own your client and take back your business!! The CLINCHER! By using a managed account; Much better client management - template your whole client base Practice efficiencies via active portfolio management, MDA so no SoA/ SoAA/ RoFA for changes Portfolio Mgt you can truly stand by - your client already thinks you do this! Own your client and take back your business!! The CLINCHER! By using a managed account; GUESS What? Who owns the relationship? He who owns the relationship can own the supply chain!

16 Set and forget is no longer a portfolio strategy Your clients are getting smarter, expecting more and wanting to pay less. Like it or not SMSF and industry funds are the fastest growing sectors in our industry- stop kidding yourself, confront the brutal facts and address the real issues It s challenging It may take more education You may lose a client or two But it s totally scalable and you will have a better business and be able to provide the service your clients truly deserve Summary Managed Accounts Better returns for your clients More control for you - greater control of the investment function Add to your margin and increase your EBIT Vertically integrate your practice and reduce supply chain risk Provide for reduced administration Provide a point of difference and Unique Service Proposition (USP) for higher net worth clients who seek active management

17 Key Message Managed Accounts changed the way Henderson Maxwell does business