Wealth Manager 2.0 – cheaper, better, simpler by design

Jan 18th, 2023 | By | Category: ETF and Index News

By Raj Sheth, Commercial Director at Leverage Shares; and Allan Lane, CEO of Algo-Chain.

Raj Sheth, Commercial Director at Leverage Shares; and Allan Lane, CEO of Algo-Chain.

Raj Sheth, Commercial Director at Leverage Shares; and Allan Lane, CEO of Algo-Chain.

Why product design matters

With the model portfolio industry attracting over $5 trillion of assets, it’s no surprise that portfolio construction is now a science providing a framework that has given birth to many core investment solutions.

To this, we can add the innovation in the product distribution space that has seen a surge in new listings, particularly in the ETP category.

Welcome to the world of Wealth Management 2.0, where the next generation of financial advisors is standing out from the crowd with their own personalized service built around a core/satellite proposition. With the ability to combine a core portfolio, distributed for example via an ETP wrapper, with some themed investment selections, an advisor can readily make recommendations that are of interest and of relevance to their end clients.

The status quo today

  • Don’t limit your strategy based on your platform partners
  • ETPs simplify operations and enhance distribution across investor types, including overseas
  • Total direct and indirect costs produce a superior product for less outlay, benefitting investors

It wasn’t always that way. The needs of medium and small-sized wealth managers (WMs), while straightforward to understand, often struggled to be met when faced with the restrictions placed on them by their back-office platform. Given that many discretionary fund managers (DFMs) prefer to offer their model portfolios on multiple platforms, the challenges are not insubstantial, especially in the selection of supported instruments across all platforms.

Making changes to portfolio holdings on different platforms often comes with delays and tracking differences; and because this is so resource intensive, it’s not uncommon to find a fund or ETP available on one platform that isn’t available on all their target platforms. Limiting the available choice for DFMs and restricting the scope of the universe of relevant investors due to platform limitations inevitably results in capping the potential scaling of the strategy’s AUM. All these challenges have given rise to the more streamlined, cost-efficient white-label approach.

What’s driving the adoption of ETPs by the larger wealth managers?

In the context of a unitized model portfolio, an ETP is in essence a debt security that can be listed on all major exchanges, like the London Stock Exchange’s Main board, and is nothing more than a re-packaged portfolio of assets that might include ETFs, funds, investment trusts, or stocks.

It is perhaps not surprising that by increased use of innovative technology and better design, wealth managers have addressed the platform inefficiencies alluded to above. Coupled with this has been the growth of firms offering a ‘Direct-To-Consumer’ proposition and with that has been the constant demand of needing to provide a cost-effective service. However, raising their own technology capabilities can get one only so far, as the ecosystem as a whole requires an upgrade. More specifically, the innovation needs to be done at the product structuring stage, which can then be accessible on many platforms given they get issued with a standard ISIN, where the investment strategy will have been internalized within the product and external dependencies greatly reduced or removed.

Until recently, the Open-Ended Investment Companies (OEIC) Regulation from 2001 offered the only realistic way a WM could unitize their portfolio offerings, but only then for firms with sufficiently large pools of assets under management. One often heard the magical figure of £100 million as being the break-even point when launching a fund. Roll the calendar forward twenty years and with the increased adoption of ETPs, that figure has gone down considerably, and now the break-even point is at a number closer to £5m for the superior ETP wrapper. Unlike OEICs, the ETP can be passported across Europe, offered in multiple currencies, and trades on screen all day while being ISA and SIPP eligible too.

New product launches and/or conversion costs start at as little as £30k and falls as the number of ISINs and AUM scales up. This allows the outsourcing of all aspects of the product management lifecycle to leading institutional partners such as BNP, LSE, etc while freeing the WM to focus on their investors, branding, and managing the portfolio strategy.

Benefits to the end investor

As the democratization of the financial services industry continues, expect more firms to utilize the white-label approach and sign up for ETPs as a service. Why spend valuable bandwidth doing all the unglamorous and laborious regulatory activities that come with managing a listed ETP when your fund manager ‘valet’ will do that for you? In the end, though, the end investor is king, and with the recent change to Capital Gains thresholds in the UK, many investors will be scrutinizing the tax treatment of their investments, and it often remains best that profits/losses are offset within an instrument.

Lower embedded costs will always help drive more efficient returns, but it is imperative that the benefits resulting from product design are passed on to the end investor. As a WM, there is always the choice of whether to build or buy, and while going at it alone is always an option, for many firms it is not worth the time and cost. Given their size, and the availability of white-label solution providers in the ETP space continuing to grow, for many WMs there has never been a better time to scale up one’s ambitions and distribution reach.

(The views expressed here are those of the authors and do not necessarily reflect those of ETF Strategy.)

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