Fragmentation of advice sector to open doors for boutiques
Adverse publicity and the end of a cycle of planning group acquisition by the leading players in Australia's financial services sector could see the popularity of boutique fund managers soar.
Ellerston Capital and Realm Investment House head of distribution and investor relations, Andrew Seddon, forecast that existing boutique managers would benefit from the fragmentation of the advice sector, as leading advisers walked away from aligned groups in favour of taking on their own Australian financial services licence (AFSL).
For much of the past decade, boutique fund managers have needed to develop close ties with the "Big Six" (the four major banks, AMP and IOOF) to access the distribution networks required to get in front of advisers.
"We're going to move into a fragmentation cycle where we are already starting to see some of the best financial planning businesses in the country starting to break away and set up their own AFSLs." - Andrew Seddon
The winds of change
However, he said change had swept through the advice market that may open the doors for boutique fund managers to get in front of advisers more easily.
"[Over] the last five or seven years, we've seen this vertical integration cycle where the major institutions - the Big Six - have been on an acquisition path of acquiring financial planning businesses," he said.
"That cycle now has come to an end and we're going to move into a fragmentation cycle where we are already starting to see some of the best financial planning businesses in the country starting to break away and set up their own AFSLs.
"So what that means for a boutique is their opportunity set starts to increase - it's not going be immediate, but I'm bullish on the opportunity set based on that future cycle."
WaveStone Capital principal, Catherine Allfrey, agreed that the movement of advisers away from the major players offered boutiques an opportunity to grow.
"We're seeing a lot of change," she said. "Recently you've had the UBS divestment, and then you've also had the spotlight turned on Macquarie Private Wealth as well, so at the high net worth end we're seeing quite a lot of change with advisers moving to different shops.
"Which to be perfectly honest has been a positive for us, because if you've got an advocate moving from a big house and going into more of a niche player or moving to somewhere else where they haven't been using our products and suddenly an adviser moves and comes in and says, ‘have you seen this fund? Look at these numbers, I trust these guys, come and meet them.' That's been a positive for us.
"[While] dealing with UBS previously for our products to be approved, because we have a long-short product, for that product to be approved it had to go to Zurich to be approved and it was just so hard for those advisers to use our products."
Growth of independent advice
While less certain that the advice sector has started to fragment, Prime Value Asset Management chief executive, Yong Quek, said the "jury was not out yet", but the adverse publicity the sector has faced over the last two years has benefited independent groups.
"The few [advisers] that we know and work with, they have grown significantly in the last year or two as a result of being seen to be independent, being able to look after their clients, tailor products that suit their clients, rather than being influenced by the big majors," he said.
"Because we're a boutique, we find that we get support from planners who are independent, we get support from family offices, we get support from people who understand investment, who really want a more high conviction investment that's not really replicated [elsewhere]."
More informed
Quek added that many independent advisers were eager to differentiate themselves from other advisers, and doing more research on boutique funds.
"Financial planners are doing more due diligence on the managers that they are putting money in," Quek said.
"I think one should do the right thing for the investors, but the second thing is about differentiating themselves from other planners.
"In other words, if they have done some research on a few boutiques, they can offer that to their clients as their value proposition.
"As a boutique we welcome that, because we would prefer any financial planners or investor to invest in us after knowing our investment philosophy... that means they understand the outcomes and won't be surprised by the outcomes."
Money Management/Lonsec Fund Manager of the Year, Australian Equities (Small Cap) award winner, SGH ICE fund portfolio manager, Callum Burns, agreed that advisers had been ensuring they were well informed about the options available to them through boutique funds.
"Advisers are very professional and very rigorous," he said.
"Their initial focus is obviously on the investment capability - both its return characteristics and its risk characteristics - but once you pass that step, the back office and the custody obviously need to be robust as well before advisers will consider investing in you."
Opportunities
Beyond talk of fragmentation of the advice market opening doors to previously unreachable advisers, who were unable to offer clients access to certain boutiques, due to the approved product lists of their AFSLs, Ellerston's Seddon believes there is a wealth of other opportunities.
"There are great opportunities for boutiques, because the things boutiques have got compared to the large fund managers is nimbleness [and] client alignment," he said.
With many leading institutional Australian equities fund managers focused on a small number of companies, Seddon said boutique funds were able to offer advisers and investors diversification of both assets and risk.
"The top 20 Australian equities fund managers' average book size is $15 billion, so they're all in the top 20 [companies listed on the Australian Securities Exchange (ASX)]," he said.
"Seventy per cent of the market weighting is now in the ASX20, they have to be there, because if they deviate too far away from that ASX20, they get it wrong, that's reputational damage, that's their bonuses.
"With a fund manager like us, we don't need to be there, we can go outside, because we identify mis-pricing opportunities outside the ASX20 and our track record will testify to that.
"We can clearly state to an adviser we provide asset diversification, and secondly we can state to an adviser that we provide risk diversification, and now that's the holy grail in Australia."
Personal touch
For WaveStone co-founder, Allfrey, being able to focus on her passion of producing performance, rather than focusing on funds under management (FUM), was a key driver in deciding to set up the boutique.
"The reason I went into a boutique structure was that I really enjoy investing immensely, and I really enjoy delivering performance for my unit holders," she said.
"And I wanted to be able to work in an environment with people that I shared the same values and shared the same way of investing, and then therefore deliver that performance to our investors, rather than being part of a cog in a wheel and part of a massive machine when you're in one of the big funds management houses."
Skin in the game
With most boutique fund managers investing alongside their clients, Allfrey believes the fact that they have "skin in the game" reinforces their focus on performance.
"Outside of our homes, the biggest asset we've got is our investment in the WaveStone funds," she said.
"So we're totally aligned to perform for our clients."
Seddon also noted that boutique fund managers tend to back their investment convictions with their own cash, in a way institutional fund managers do not.
"In boutique-land, they're typically going to co-invest alongside their investors," he said.
"Boutiques are typically going to have performance fees, and a certain percentage of that performance fee gets distributed amongst the team - large fund managers aren't going to have performance fees, they're just playing a cost game and competing on cost rather than competing on alpha."
Team continuity
For Triple3 Partners chief investment officer, Simon Ho, one of the keys to success in the boutique sector has been securing a strong team with minimal staff turnover.
"We've got a very good team, a loyal team, we haven't had any turnover," he said.
"If you didn't have that, if you had people coming and going, and people who weren't committed to the cause then I think you would really struggle.
"You need to have people who are adequately skilled, and when you're talking about a boutique, that's just so specialised, you need people who understand that market intimately, before it's going to work. "Then you've got all the added problems - you need to make sure there's good teamwork, that there's good interaction between people, that there's no conflict - you have to manage that obviously, but also hiring people.
"The hiring policy becomes more important, when you're in a small team, because the addition of one or two people can make a huge impact on the rest of the firm."
For more on boutique funds management see - Building a boutique not without challenges.
AUTHOR
Nicholas O'Donoghue
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