How SMAs helped drive growth in our financial planning practice

Smart practice

"SMAs allowed us to direct more and more time to delivering client value. We've been able to invest more time and energy into conducting a more detailed annual review process with each client, really drilling down into their particular situation."

- Julia Schortinghuis, Lighthouse Capital


As a former stockbroker and Vice President in the funds management division at Merrill Lynch, Julia Schortinghuis was in on the ground floor with SMAs. In 2005, when she joined her husband’s financial planning business as Practice Manager, she wanted SMAs on the table as the logical extension of what Lighthouse Capital was already doing. “The practice has always specialised in managing customised investment portfolios with an emphasis on income generation and capital preservation. This involves investment solutions that almost always included a direct element,” says Schortinghuis. “When I arrived in the business, Managed Discretionary

Accounts (MDAs) were already in place to help us offer our clients tailored investment solutions at a lower overhead. I saw SMAs as the obvious next step – with the potential to drive efficiencies even further. As soon as they became available on platforms we added them to our offering.”


Why SMAs?

“With my background at Merrill Lynch, I’d been around the concept of SMAs since the beginning. I knew they’d be a fantastic growth driver for our business. While we also use traditional managed funds as part of the overall portfolio solution, they do have some limitations. Clients often end up buying into embedded capital gains and it’s really difficult to gauge future distributions. Whereas, SMAs enable the client to have their own cost base and make it much easier to understand likely income generation.” “From a practice perspective, I was also very interested in capturing the efficiency benefits of ongoing professional management. SMAs allowed us to direct more and more time to delivering client value. We’ve been able to invest more time and energy into conducting a more detailed annual review process with each client, really drilling down into their particular situation. It’s given our clients a higher quality and more personalised experience.”

With their clients already on Macquarie Wrap, Schortinghuis says it was easy for Lighthouse to switch clients into the chosen SMA. “We only hit two minor stumbling blocks. Depending on which platforms we were accessing, there were some restrictions on minimum investable amounts. Also, we learnt that, when you’re implementing strategies such as converting to a pension, there can be a two or three-week delay if there’s an SMA in the portfolio. That’s just something you need to be aware of so you can manage clients’ expectations accordingly.”


What model did you use?

After considering whether to ‘buy’, ‘partner’ or ‘build’ to integrate SMAs with her business, Schortinghuis decided to start off with a buy model. “It was a relatively quick and easy way to ensure our clients could achieve consistent investment outcomes, by partnering with best of breed investment managers and simultaneously adding diversification benefits.” She quickly found an SMA that dovetailed with Lighthouse’s investment philosophy. “Our investment philosophy is firmly anchored around the client. We run an investment committee, but our advisers tailor investments to meet individual client needs, depending on their age, risk profile, goals and objectives. Where appropriate, we will use an SMA as a core within the Australian share exposure, and then add complementary satellites to create even more diversity. We further diversify by including best-of-breed fund managers for certain asset classes, like international, combined with Listed Investment Companies and exchange-traded funds.


How did you introduce SMAs to your clients?

She says that, because Lighthouse was already offering MDAs, introducing SMAs proved to be straight forward.

“We introduced SMAs in conjunction with clients’ annual reviews. We found one-on-one conversations were the best way to help clients understand what SMAs are and how they could benefit. After going through the reasoning, and explaining the fees and the nuances, our clients were comfortable from the outset.” Now that Lighthouse has been using SMAs for a couple of years, their clients are clear about the benefits. “It’s been interesting to see what resonates with people.

The benefits our clients mention most often include:

Transparency

One of our younger high net worth clients said he had felt really disengaged from super for many years. It was a black box. He really had no idea where his money was invested. Now he has an SMA, he can see the underlying assets. It makes him feel more connected with his investments and more confident of outcomes.

Affordability

People love the fact that we can deliver a direct approach at an affordable price. Our clients understand that adjustments along the way are done on a pooled basis, significantly reducing the brokerage costs.

Beneficial ownership

Unlike a managed fund, each investor in an SMA has their own cost bases. This means a client is the beneficial owner of the underlying shares, so they receive dividends and franking credits directly, which we feel is particularly valuable.


What benefits have you seen since you introduced SMAs?

“We’ve seen significant movements in both profitability and return on equity in the practice. While it’s hard to pinpoint exactly how much of that is connected to SMAs, I believe the reduced administration and the additional time we can spend in strategic client conversations are a big part of why both of those metrics have improved substantially. “For us, the extra client time is the most important benefit of using SMAs. We work with a lot of clients who have a high level of complexity around their circumstances. SMAs have allowed us to reinvest that time in areas that really matter to them.”


What's next?

Having seen how SMAs improve the practice’s efficiency, scalability and profitability, Lighthouse Capital is eventually planning to build their own.

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