Research house round table: A learning curve that is too steep

The recent round table discussion held by Money Management examined concerns over adviser education levels and their capacity to meet the individual needs of clients.

Present at the round table

NG: Norman Graham (managing director, Lonsec)

DW: David Wright (director, Zenith Investment Partners)

LM: Leanne Milton (head of funds research, Standard & Poor’s)

M Thom: Mark Thomas (chief executive, van Eyk)

AB: Andrew Bird (chief executive, Morningstar)

MT: Mike Taylor (managing editor, Money Management)

MT: Do you believe financial advisers, broadly speaking, are sufficiently educated about what it is you’re really telling them? Because it seems to us at the journalistic end of this that there are a number of advisers who really don’t know how to use the material you’re giving them. You’re giving them everything that they ought to need to know, but do they really know what it is they’ve got?

DW: I reckon there are two aspects to that. One is the education, the other is … the communication of the information. So from our own perspective, we have clients who want to centralise the dissemination of the research to their advisers. And we hate that model because it ultimately relies on how good they are at disseminating the information to their underlying advisers. Whereas the model where they still may have an internal research resource, if you like, in the dealer group, but the actual advisers gain full access to your research, helps that communication aspect. So it then becomes, as you said or alluded to, incumbent on the end adviser … to read the research reports.

And that is the other thing. We try and get as much as we can up front in the executive summary because you just know these guys are not going to sit there and read a six and seven-page research report. It just doesn’t happen. And yet you speak to dealer groups, and I don’t know if you guys agree, [but] the vast majority of them have APLs [Approved Product Lists] that are far too large. So the ability to know the individual product on an APL that is 400 products long just doesn’t happen.

NG: There does seem to be this conflict between overly large APLs which suit the platform or the dealer group and the interests of the investor, which is probably a well-constructed smaller side of options.

AB: As far as a product or sector specific goes too, I don’t think anybody around this table actually had a recommendation on Westpoint. What happened there was very much more systemic to management controls and corporate governance, whereas things like Basis Capital, we all had our recommendation of some sort, and that was very much more a market dynamic, where the market they were operating in virtually disappeared in the space of 24 hours.

NG: We downgraded it.

M Thom: It is a function of understanding the environment.

NG: That’s right.

M Thom: But the market disappeared for a reason, I think. There are styles of practice and some are strategic and some are more — tactical is probably a bad description — they will bring on sophisticated investments, which could be in the listed space or some hedge funds or what have you, and they will manage their clients more often. I think that is not so much the issue. I think the role we’re playing more and more is a communication and publishing role. And we’ve found that just producing reports and publishing them is not adequate anymore.

So we’ve introduced things like webcasts and, more recently, we’ve been doing rolling mini conferences, which are a [smaller] version of our large conference, where we see 30 people at a time and we talk them through strategy and give them an understanding of risks, and there is feedback through that whole process of portfolio construction.

I think the key to that is having a field force, and we have a large field force for our size of business who are dedicated to seeing people. So to give you an idea, we’re seeing 1,000 people between June and October through our mini conferences. Whether they act in a tactical fashion or from a product level is not the point. They understand there are issues there and we stimulate some thinking.

LM: I agree, particularly on David’s comments. In the end the adviser is time poor, like you’ve mentioned. So they are just going to say, ‘Okay, five-star rating’, or whatever rating scale we use, ‘must be good. I’m going to put all my clients in it’. They don’t read the report. And like you say, you’ve got to put about as much as you can on the front page so [advisers] at least read it and understand the risks. It might have a five-star rating and it could be the fact that it is in a really risky asset class and is only suitable for a certain number of clients. It comes back down to appropriateness and use of that. You wouldn’t be putting [your clients who need income and are conservative] into global resources. So it is about the adviser understanding the risks. They need to understand what they’re looking at in a report and the appropriateness of advice for individual investors.

DW: It is true though that it is not good enough to pump out a report with a rating on it and expect that everybody is going to act on that. So from that perspective, I agree wholeheartedly.

M Thom: You’ve got to sell the research. I mean brokers have done terrifically well over the years in simplifying things. It is almost like you’re launching a product every time you come out with a change of view. And the way we typically do it as a sector, the time and the relativity there, I think the issue is pointing out the relativity so [investors] understand where the bookends are. And okay, their favourite manager of the day may not be top of the pops anymore, but they’re still at the top-end or the top-half of the group, which for them, they can make that judgment and risk it understanding those relativities.

DW: You can have the reports on the website, you can be sending out e-mails, you can have your teleconferences and you can do your webcasts, but there is nothing like actually getting in front of clients. So whether that be by investment committee, conference, or professional development day, that is what we do.

M Thom: There is another thing that is going on, and this is probably for the top 20 or 50 dealer groups. There has been an institutionalisation of the services provided. We’ve got a full-blown consulting team that used to provide services to super funds and we shut that down probably five years ago to focus on dealer groups. So 90 per cent of their clients are dealer groups and we sit on investment committees, we help them with their model portfolios, we send out ratings impact reports around their APLs and we provide quarterly reporting on performance and attribution, which, again, is purely a communication thing because their clients will come in within the quarter. But it is saying, well, as a portfolio this is how it looks and, in some cases, we do roadshows nationally for them when they want to launch those sorts of things. So the institutionalisation of the research delivery at the top end of the market has really occurred over the last two or three years, and there is a lot of demand for those services.

DW: Increasingly it is about packaging the solution. A lot of people in the past poo-pooed things like model portfolios. [But] particularly following the global financial crisis, we’ve seen massive demand for model portfolios. Why? One, because there is so much product to cover and, two, they are actually looking for, particularly the dealer groups, a robust approach and greater consistency in what the advisers in the group are doing for the same type of client. Some of the messes we’ve seen to portfolios, even when advisers are trying to do the right thing, but there is just simple stuff like you’ll see their Australian equities exposure being totally loaded up into value managers or one style of manager. So as you say, it is more about packaging the solution in a more user-friendly fashion than historically has been the case.

M Thom: On that point of portfolio construction, sure there is risk, but there is also what is the driver of your return? In the last 20 years you saw a bull market and you just bought verbatim. So everybody has got as their core an index equity manager or a global index equity manager because it is a free kick when you’ve got disinflation. In an environment where you’ve got a choppy or a more volatile market, you need to have a different sort of a core because your index is going to get chopped around. You know there are 20-year periods in history where the index is flat, but there was a lot of volatility. So we’ve been educating people about having the index stuff as a periphery. When value is cheap, you load up with index, but as a core you need to have an active strategy and whether that is thematic or high turnover or value, whether it is deep value or even hedge fund strategies or commodity-traded advisers or whatever, they are the things that are going to make money in a choppy market. And again, you need to have buy-in from the groups that this is the environment we’re in. And that comes down to whether you do the research and convince them about that stuff as well.

LM: I think that is exactly right. It is about — broking is only one part of it. That is only the initial part of screening all that when it comes to solutions. I mean we’re talking to our dealer groups, or the dealer groups that have been coming into us since the global finance crisis, about what their investment policy is. You have to start, ‘Well, okay, let’s think about what your investment philosophy is and your policy, and then let’s think about how your models and your portfolio construction might look’.

NG: I think there is also a bigger picture here too and I sometimes think that we neglect it, and that is the product structure of what we’re looking at. Given the mayhem created from the financial crisis I think we’ve got to ask the question, is the unit trust structure the most suitable to benefit the end investor anyway? If you look at it where they have a mandate to manage money, and you end up with a situation like the last 18 months, most of these people are very good portfolio managers, but it is nigh on impossible to manage the liquidity when you have the redemptions and so forth on a daily basis, and they can move up and down depending on what the Dow Jones did when I heard it at eight o’clock this morning, etcetera.

If you’ve got a unit trust structure, I think the regulators in the industry probably also have to look at a different investment type vehicle somehow or other because I think what has been proved over the last 18 months is the unit trust structure probably should have had its day. And if we’re looking at more sophisticated research or more sophisticated advice to benefit the end user, we’ve got to actually start at the primary source as well. And I think at the moment the shortfalls in the unit trust structure have been identified in the last 12 months with tax obligations in a falling market, liquidity requirements, redemption freezes, application freezes, everything else, and I think there should be a bit more work done in regard to the product.

This is an edited transcript of the round table discussion.