The Substantial and Cumulative Benefits of ‘Portfolio Control’ Systems over ‘Portfolio Management Systems

Plan once – do it many times!?

?In today's wealth management industry, like in so many service industries, many wealth and investment advisory firms are realising that in order to thrive (and survive), because of margin pressures and increasingly educated clients, combined with tighter regulation and the need to grow, they need to service more clients, with better service, with often lesser resources.?

?For many firms, just scaling current operations is both difficult and ambitious, and this is compounded and somewhat impeded by a lack of skilled resources in the market, and a real risk that just growing what is today is not a sustainable long-term business operational model.?

?This is a ripe time for introducing a different way of thinking and how to better use technology (and AI), particularly new technologies that have been specifically designed with visions of how businesses can be better and operate in the future. ?

In many service industries (health, fitness, coaching etc)we are seeing the emergence of ‘apps’ that bring professionals together with their clients to monitor key metrics, enabling the professionals to be alerted (detect and prevent controls) when data suggests such is required, and focus their time on pro-active client engagement, often using algorithmic or AI driven apps to determine client programs rather than invest the time themselves. The benefits of making this leap are considerable from client engagement, quality, standards, brand and productivity perspective, not to mention the financial rewards that can come with such. Gaps are forming between businesses that do this and those that do not.?

?In the wealth management industry specifically, there are increasing technologies that are taking CRM from being an internal system for a firm to extending to clients for self-entering or data and self-help access to information. However, when it comes down to the process of managing investments we are dealing with a specific subject area where productivity is very much a function of not only the systems that are used but also the ‘type’ of systems that are used, particularly when the investment proposition is different for each client, which it generally is in a high touch, high-value proposition.?

?What I am highlighting here is that there are systems designed to help firms with the systemised control and directed delivery of client-centric investment experiences by the firm (let's call these portfolio control systems) as opposed to systems that are designed to enable portfolio managers seeking to do the same supported by their judgement (let's call these adviser portfolio management systems, which can vary from a spreadsheet to broadly available portfolio management applications).?

?For the purposes of highlighting this contrast, let's assume:?

• the purpose of a wealth management business is to deliver the best client experience (which is under increasing demands with complex legal and tax structures) with the best business outcomes ?
• The client investing experience is the about best implementation of the relevant firm investment policies, tailored to each client (experience preferences and investment situation /instructions), wrapped in the best way of holding investments, the perspective of their plans, presentation and relationship to suit the client
• Best business outcomes are about delivering such service to enhance reference ability (and referrals)?with the lowest costs, lowest risks, less processes, and less noise in order to maximise customer satisfaction, revenues, brand, profits, risk management and business valuation?
• We differentiate portfolio management (that requires portfolio managers to create client-specific portfolio reviews) vs portfolio control systems (that allows the definition of the ‘direction’ of the client portfolio, and the systems do the work of calculating client-specific portfolio reviews systematically)?

?Now consider what is going on and draw some contrasts of what is involved in the business operations using a 'portfolio management' system versus a 'portfolio control' system.?

Let's first start with the definition of the client-specific investment policy / mandate. If the investment policy is not entirely defined for systematic use then it is a record that needs checking against, which takes time, possible interpretation and the risk of error.?

?We find most portfolio management systems allow for asset allocations, and tracking to model portfolios, but a portfolio control system extends to consider all standing instructions around how the client's investment portfolio (or portfolios as it is increasingly common that clients have numerous accounts) to be automatically considered. Examples of such include attitudes to realising capital gains on investments, specific rules about what must be retained or excluded from the client portfolios, tolerances, how some investments are considered ‘like’ others etc.?

?The business operational differences however are magnified in the difference between 'portfolio management' and 'portfolio control' systems in that the outputs of portfolio management systems need to then have skilled ‘judgement’ applied to ensure what comes out is then applicable for the specific client, often with reference to other client notes (which may be interpreted differently by different people), whereas a portfolio control system has already used its more advanced capabilities to resolve these things already.

?The compound business impact of the need for this level of judgement escalates beyond just portfolio manager time and effort, but extends into:?

• How is such judgement applied consistently across the firm to provide common client?/ brand experience??
• What skills are required to ensure these judgements are sufficient, and what costs do these skills come at ??
• What training is required for portfolio managers to be confident in such judgements?
• What needs to be done to ensure the continued availability of resources to perform judgements when some staff may be on leave ??
• What management effort is required to hire, manage and keep those resources motivated ?
• What checking and auditing needs to be done to ensure judgements are maintained at the standards that clients and the firm expects ??

Let's put some metrics around what this need for judgement (ie the gap between a portfolio management and portfolio control system) can cost at a client portfolio, client adviser, management and firm levels. Below is also a sample worksheet to give some indicative quantum based on a 10-adviser firm with 1,000 clients.?

?CLIENT INVESTMENT POLICY RECORDING?

?Where a client investment policy is fully defined in a system that considers the mathematics of such, as opposed to where it needs to be applied by judgement, there are cost impacts in terms of resources defining it, resources interpreting it and its ongoing maintenance. This both introduces the risk of misinterpretation but also requires a level of maintenance.?

• For a 'portfolio management' system environment this may be additional notes in the portfolio management system and / or CRM to maintain.
• ?
• For a 'portfolio control' systems environment, the full investment policy is defined and considered in all control activities.?

?For our sample firm, let's assume this consumes between 1 and 4 hours of resource effort per year per client.?

?PORTFOLIO REVIEW ACTIVITIES?

?In considering the costs of keeping client portfolios in line with their specific investment policy agreements / mandates, this can often be broken down into 3 key work items:?

• The cost and effort to implement detect and prevent controls to identify if and when client-specific portfolios are outside the mandated agreement. Whilst the periodicity and triggers of testing each portfolio varies for each firm according to their service level (from daily to once a quarter)
• For a 'portfolio management' system environment this may take anywhere from no time (where client mandates are sufficiently generic like asset allocations) to hours of effort where there are client-specific instructions and considerations to ‘test’ against. This can be repetitive and laborious work that is often then sidestepped creating possible risk to clients and the firm.?
• For a 'portfolio control' system, the complete definition of the client mandate will mean that all portfolios are tested against their complete mandate continually.?

?The difference in time and effort here is clearly a function of the level of client-specific service / investment mandates, however, in the real world of client portfolio histories, tax considerations and specific instructions, this can be considerable.

Let's assume for our sample firm this could be 0.5 hours of work per client 10 times a year, and up to 2 hours of work 20 times a year.?

• The costs of the effort to implement client-specific adjustments (in accordance with their investment policy statements) beyond what the portfolio management system can generate. This often is the work that portfolio managers do to iterate the output from a portfolio management system to consider client-specific rules, preferences and constraints that are on the client record notes. This is work like ensuring that client positions that have high capital gains (and hence possible tax) are not sold, working out that it makes little sense to buy a security in a model portfolio that the client already has an ‘overweight’ position in similar security, checking calculated orders are of a meaningful quantum to effect change etc, etc.
• For a 'portfolio management' system environment this may take anywhere from no time (where client mandates are sufficiently generic like asset allocations) to hours if not days of effort where there are client-specific instructions and considerations to be considered. We often hear of iterative cycles with spreadsheets that can even involve numerous staff to apply judgements and resolve them before completion. This can result sometimes in different outcomes and scenarios, some of which require a ‘memory effect’ to ensure are not conflicted with prior determinations.?
• For a 'portfolio control' system, the complete definition of the client mandate will mean that all portfolio reviews are pre-compliant with all the client-specific instructions.?

?The difference in time and effort here is also a function of the level of client-specific service / investment mandates, however, in the competitive world of demonstrating service and value, this is important.

Let's assume for our sample firm this could be anywhere from?1 hour of work per client 4 times a year, up to 4 hours of work 10 times a year.?

• The costs of auditing / checking that client portfolio reviews are up to sufficient quality. For good governance, most firms have a level of portfolio quality control to check that portfolio adjustment that has been made are sound and in line with the client’s instructions. If this is to be done effectively it is important that both the auditor / checker and portfolio manager are working off the same information sets and methodology.?
• For a portfolio management system environment, where clients have specific instructions, this means that whoever is auditing / checking needs to work through additional client notes, ensure that this is understood and be satisfied that the judgements of the portfolio manager align with their own judgements
• ?
• For a portfolio control systems environment, this auditing / checking will have already been done by the system and the auditor / checker can inspect each and every client portfolio review in its entirety. Not only that, this will be done by the continuous portfolio monitoring detection and prevention controls mechanisms to proactively alert the auditor / checker rather than invest the investigative time.?

The difference in resource time and effort again here can be considerable, and firms report this saving anywhere from half to a few hours of resource (both auditor / checker as well as portfolio managers). This cost to fill in for process shortfall again is an overhead to the firm that resources could be applying to higher value activities.

Let's assume for our sample firm this could be anywhere from half an hour of work per client 4 times a year, up to an hour of work 10 times a year.?

PORTFOLIO MANAGER RESOURCING?

It's not news that with the introduction of automated navigation systems, the cost of taxi drivers has been reduced somewhat, and in many cases, the client experience (in terms of getting from A to B) has been somewhat improved (and the passenger can even continually check on the booking, location of the driver and estimated arrival time).

Whilst not a direct analogy to a highly regarded and valued profession like investment advice, there is a recognised trend that there are opportunities (and needs for such in a resource-tight environment) to employ lesser skilled resources that can deliver a similar if not better experience when supplemented by systems that remove the need for skilled judgement, especially if overseen with quality control.?

The impact of this for wealth management firms can be dramatic both in terms of career paths for highly skilled resources, but also in the cost of human capital to deliver to client servicing obligations. ?

• In a portfolio management system environment where additional judgements are required, portfolio managers will require skills to make such judgements and this can also form key man risk dependencies that can alter the normal management of the firm. Other additional costs include the need for ongoing training and the costs of organising cover when key people are on leave or absent.
• In a portfolio control systems environment, where the need for judgement is somewhat reduced, if not eliminated, then there is the opportunity for skilled resources to oversee lesser skilled or experienced resources, allowing more for a portfolio ‘directing’ and implementing nature rather than portfolio ‘management’ with associated costs. The directing function is more in line with the client strategy setting, whereas the implementation function can become more systemised, increasing consistency, reducing costs and enhancing risk management.?

?Let's say for our sample firm that the impact of introducing a portfolio control system environment supports reducing portfolio manager costs (in terms of % of overall employment costs) by as much as 25-50%, reduces training costs by as much as 5-10% and the cost of covering by 5-10%.??

MANAGEMENT OVERSIGHT?

The reality of any business is the need for a level of management oversight associated with operating, controls and risk management.?

?The compound effect of complexity and the need for judgements in business operations is often poorly understood, with an impact on the amount of effort required to oversee such in terms of policy setting, control systems, recruitment etc. Often the key issue is that until there is a clear vision of something better, then the status quo remains the norm, sometimes holding back the business.?

• For a business with 'portfolio management systems, there is the constant need to find, recruit, train those resources required to make such judgements, and then monitor their judgements in line with the trained policies?
• For businesses with a 'portfolio control' system, where the judgements and associated processes are defined and embodied in technology, this challenge is somewhat different. With the ability for any one person in the team able to run through the workflow processes, this solves key man risks, and staff going on leave and makes a much easier recruitment and oversight process.?

?Let's say that for our sample firm, the management overhead of effort to oversee the process of managing to ensure quality judgements is between 20% and 40% of a senior manager's effort and hence total costs.

FIRM-LEVEL?

At the firm level, in addition to the financial and resource benefits outlined above, considerations are also more focused on the less tangible areas of brand, controls, service standards, culture, ability to grow and overall risk management.?

These are areas where in a world where there is increasing utility and customer satisfaction with clients dealing with apps and websites unless there really is a need or want to be dealing with a human. Sure it’s great when it suits to have the human touch, however also how many times do we find ourselves in situations where we really just want the pure information rather than getting it through the biases and barriers of other humans ???

ANALYSIS?

So let's look at what this can mean in terms of cost savings for our sample firm in the below worksheet.

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By implementing a portfolio control system, just in time, effort and resource costs were talking for our sample firm savings of $2M to $20M per annum. These are dramatic differences when thinking just about the different ‘types’ of systems to help with the delivery of portfolio propositions to clients.?

?So how does one go about understanding what are the different type of systems we are talking about being very careful in analysing and assessing??

• How well a system can define client investment policy for each client – this is about the definition?
• How well can the system provide detect and prevent controls as timely as the firm (or client proposition) needs – this is about time, effort and accuracy (it's not good enough to just have model deltas) ?
• How well (speed and accuracy) can the system provide definitive adjustments in line with changing research and markets?

CONCLUSION?

The choice of a 'portfolio management' system vs a 'portfolio control' system is a critical decision and will fundamentally impact both the firm’s operations, and its definition, being, financial performance, and ultimately valuation.?

?To achieve this though, leaders of the firm have to see the firm in the light that a portfolio control system was built for, and that the work of the firm is not so much about managing client portfolios but recruiting and servicing clients with systems to do the supporting work.?

?Some of the key differences are summarised below:?