“When people have too many choices, they make bad choices.”
— Thom Browne
A Help and Hindrance
In our experience reviewing over approximately 11,500 adviser files, the Approved Product List (APL) is a central element of the best advice and the very worst.
When properly constructed and maintained, when well researched and properly interpreted, the APL provides the tools good advisers need to provide great advice and satisfy client needs.
When improperly constructed and inherently biased, when based on legacies and inflexibly applied, the APL delivers financial product sales that too often are achieved at the cost of the client’s material detriment.
A bad workman blames his tools but that’s not a reasonable criticism when advisers are given defective tools and have no access to alternatives.
In this article, our Managing Director, Sean Graham (outclassed, under-prepared and out-of-shape) goes head to head with Smokin’ Paul Saliba, the Founder and Managing Director of Evolutionary Portfolio Services.
Our aim is not to address adviser misconduct but, instead, to address the Approved Product List and discuss its importance to licensees, advisers and clients.
It’s only ten rounds, but it’s not an exhibition fight, so although we’ll start with jabs and feints, prepare yourself for the main event.
Why do I need an APL?
An Approved Product List can provide practices and their advisers a shortened list of best of breed products to help facilitate fulfilling their best interest duty. Advisers can gain some comfort around products that are managed on an APL if the management of the APL is by an individual or group that considers a range of qualitative and quantitative factors in relation to investment strategies.
This helps advisers identify higher quality solutions across all assets classes while also identifying investment solutions that have genuine concerns around their ability to meet their stated objectives. We believe a regularly maintained APL will assist the licensee with the AFSL obligations and help facilitate advice being in the best interest of client where a product is recommended.
APLs can make the work of an adviser more efficient and limit the risk that clearly inferior products are recommended. They assist advisers with their obligation to conduct a reasonable investigation into alternative products by bringing to their attention a range of preferred products in any given part of the market that they can then consider for their clients.
In reality, the Approved Product List is a control mechanism; it provides a curated list of products from which an adviser can select properly reviewed and vetted financial products. Considering the broad universe of financial products available to advisers, it would be practically impossible for an adviser to survey, research and assess all the options available to them and their clients.
The APL provides a short-cut to appropriate advice. It would be naïve not to recognize that there’s another aspect of this control mechanism – the APL provides a toll by which licensees can influence recommendations and encourage product sales.
This is the aspect with which ASIC are particularly concerned and prudent licensees need to reconcile the commercial aspects with their obligation to avoid embedding bias and ensuring that both the licensee, and its representatives, act “efficiently, honestly and fairly”.
It’s also important to appreciate that an APL provides a shield against liability; if you recommend products that aren’t on your APL, you might find that you’re excluded from the cover provided by your Professional Indemnity Insurance.
Whose research should I use?
There’s no legal requirement to use any other party’s research but it’s prudent to supplement your own analysis with objective, qualitative and quantitative research. The trick, if there is one, is to properly consider the capabilities and conflicts of the researcher on whose analysis you will be relying. Remember, their research can supplement and inform your own assessment, but it is not a substitute and, regardless of their analysis, you cannot avoid accountability for the appropriateness of your recommendation. Ultimately, it’s the adviser (and not the research provider) that is accountable for the advice and product recommendation. So, consider the provider’s
- reputation (scope, quality and reliability) and historic performance;
- specialisation and expertise;
- financial model and conflicts;
- team, experience and methodology;
- transparency and accessibility; and
- available tools and resources.
If you’re unsure about what to expect (or what to include in the Service Level Agreement) contact us or an independent provider like Evolutionary Portfolio Services.
It’s also important to appreciate that your provider may, and, in my view, should provide services including
- comprehensive research on investment products, classes and sectors;
- participation on your Investment Review Committee (or equivalent);
- maintaining the Approved Product List;
- monitoring products on the APL;
- supporting your internal research capability;
- providing adviser support;
- delivering adviser training on investment and product research issues.
A combination of research house and investment specialist views are important to distinguish between they volumes of well rated products and to bring an investment and portfolio construction lens to the development of the APL.
Through the use of an investment specialist the APL can be tailored to the investment philosophy of the Advice business.
How do I decide what goes on my APL?
The investment philosophy of the business and its client should define what is and is not considered for inclusion on and APL.
For products such as insurance and platforms the costs and functionality requirement will drive what products are considered for the APL.
The quality of the product should then determine its inclusion/exclusion from the APL.
The quality of the product should consider both qualitative and quantitative factors and needs to be applied with a level of consistency. So for example if it is believed that larger investment teams lead to better outcomes, a small team in a Small companies fund would be inconsistent with that view.
That is to say the construction of the APL should not involve cherry picking of attractive/unattractive characteristics where the same thing is seen in some instances as a positive and in other instances as a negative unless this can be well justified for a given circumstance.
I agree with you Paul, the culture of the business (and its mission and values) will, and should, determine their approach to advice and, as a consequence, the breadth and depth of their Approved Product List.
In my view, each Licensee’s Approved Product List should be distinctly different and tailored to their approach and their client value proposition. Some businesses may apply more weight to qualitative elements than quantitative, some may construct Lists that prioritise ethical and sustainable investments or public benefits such as infrastructure or other alternatives. Some may avoid the complex products that are demanded by more sophisticated businesses and wholesale clients.
Historically, there was a tendency for APL to become homogenous and internally focused, but the disintegration of the institutional licensees model has led to more Licensees taking more responsibility for the proper construction of their Approved Product Lists and the financial products that they can recommend to their clients – this has led to opportunities for new providers offering different, and sometimes clearly better, alternatives to in-house platforms and associated providers.
What should I include on my APL?
The correct answer is that you should include on your APL all the products that you’ve reviewed and approved for your advisers (but I suspect what you’re really asking is what types and classes of products are generally included on an APL).
Paul will no doubt provided a more considered research-driven perspective, but the only real guidance I can provide is to consider the nature, scale and complexity of your business (and the likely needs of your prospective clients) and build an APL that provides your advisers with a reasonable selection of products, platforms and insurers that are consistent with your authorisations, your advisers competency and the ‘product value’.
This last element is difficult to define but encompasses product cost, likely benefits, risk profile and target market determination.
In practical terms, your APL should include a curated selection of Managed Investment Schemes, Platforms and facilities (IDPS, Wraps and MDA), Insurance, Equities, Alternatives, Superannuation Funds (including Industry Funds), Annuities, Investment Bonds, Basic Deposit Products.
Remember, your APL is a living document that should change over time to respond to market conditions, provider performance and regulatory matters.
This will be impacted by the philosophy underpinning the APL, however best of breed in assets classes and their sub classes would enable advisers to facilitate both sensible diversification with any client preferences and over arching economic or market conditions.
The ability to diversify portfolios should be facilitated by a diverse APL.
So while philosophically a practice and its advisers may be aligned with value investing it may not be in the clients’ best interest to exclusively invest in this way and therefore having best of breed funds that expose investors to other risk factors is likely to be appropriate.
However it is unlikely that an APL would need to have every sub-sector and industry that is available in the market represented because few advisers have the necessary expertise to determine what should or should not be included .
These exposures can be accounted for in broader market strategies where either market weight or manager determined weight (through bottom up analysis or based on thematic views) will enable portfolios to be exposed or tilted to any area of an assets class as professional investment managers deem appropriate.
What’s an investment philosophy?
An investment philosophy is a set of beliefs and principles that form the basis of investment decision making. It should be supported by evidence and should be open to change as evidence comes to light.
An investment philosophy should include views across asset classes as well as currency, and should consider things such as asset allocation, diversification, cost, the level of market efficiency.
Whether you recognize it or not, you have assumptions, biases, convictions and circumstances that determine, or at least influence, your approach to research, portfolio construction and product selection.
Sometimes, it will be driven by moral convictions or quantitative measures and in others by qualitative or moral positions. In most, it will be a combination of these.
In terms of the APL, your Investment Philosophy is simply the articulation of those elements that influence your assessment and selection of financial product i.e., transparency, performance and value. It doesn’t have to be exhaustively defined, but it should clearly articulated so that it can guide and assist you and your advisers to make appropriate recommendations.
How do I rank/rate/assess investments?
Both qualitatively and quantitatively.
It’s important to use a qualitative assessment in conjunction with quantitative assessment because, unless you do, you can’t properly understand the prospects in relation to risk and return, the ongoing viability of the product or the operational risks and the integrity of those involved in operating and managing a product.
Performance is important component to assessing any investment.
The ability of the manager to deliver in the future may be indicated by their past. The volatility, size of drawdowns, time to recover, total returns all will enable one to form a view with a reasonable basis on the ability of a manager to deliver on its objective.
I’d also emphasise the need to assess risk management systems and process, business operations, financial stability for both the product and the business.
As critical as investment philosophy, processes and people are all important considerations when allocating capital to a product.
I’d echo Paul’s observations about the double-edged sword of performance data and the need to balance quantitative and qualitative elements in a manner consistent with your conviction, preferences and investment philosophy.
But from an operational perspective, I’d suggest that your qualitative assessment should consider variables like:
- Does the Product Issuer demonstrate a stable corporate environment, a clear strategic vision for the company and an appreciation for the environment in which they operate (including non-financial and emerging risks)?
- Does the Issuer have a clear, consistent and predictable investment process?
- Do they have internal performance measurements and appropriate risk management (with an appropriate focus on environment, social and governance issues)?
- Do they have (and retain) qualified, experienced and capable staff? (Key departures and high-turnover should be red flags for competent licensees).
- Do they consistently deliver appropriate and effective administrative and client services? For example, if claims are routinely delayed or if underwriting is unnecessarily laborious, you might review their appropriateness on your APL.
- Can they illustrate that they have the systems and technology to provide the capacity to manage current and future demands. For example, you should consider whether the Manager can effectively switch investment options or manage liquidity.
- How has the Issuer has performed relative to a benchmark?
- Has the Issuer added value through stock-selection?
- Have the Issuer’s returns varied in line with movements in the market?
- Is the Issuer’s downside volatility acceptable?
- Were the risk taken by the Issuer to achieve the excess returns acceptable and prudent?
- How successfully (in terms of returns) the Issuer has tilted the portfolio away from the benchmark.
How do I rank/rate/assess platforms?
Platforms provide what some would suggest is a commoditised product that is about functionality, cost and confidence that the assets are safe. Therefore an understanding around the business that provides the platform, its ongoing viability and the third party providers for custodian, accounting and audit services are all important in determining if a platform should be included on an APL.
Many of these factors can become a hygiene factor and then the determination will come down to cost and functionality (including reporting). Not all clients need to most comprehensive functionality and so a range of solution may be appropriate to address varying needs of clients.
Where the platform also operates a superannuation fund understanding who the registerable superannuation entity is also important. Where the platform provider is the RSE the APRA requirements can also provide a layer of comfort and address the hygiene factors.
As Paul observed, ‘Platform’ is a broad church and, in practical terms, includes Master Trusts, IDPS, IDPS-like schemes, Corporate Super Funds, Facilities and administrative vehicles. recommendation is complex because it is in fact a combination of three recommendations:
- the vehicle as an administration shell
- the underlying investment funds
- the available risk-insurance options.
It’s prudent to have a curated list of platforms available to your advisers, but they should, at a minimum be:
- licensed or regulated;
- reasonably likely to satisfy clients’ needs and circumstances;
- convenient, transparent and accessible;
- Support the products on your APL;
- Sufficient range of investment choices; and
- Support diversification.
How frequently should I review my APL?
Investment products are reliant of the business and people that manage them and therefore are subject to meaningful change at any point in time. This would suggest that a level of ongoing awareness is important.
Adviser obligations apply at the point that they provide advice therefore to assist advisers to meet their obligations ‘ongoing’ monitoring of investment products is important. This may not mean changes are required immediately upon a change with an investment product, but awareness and some consideration would be appropriate.
Platforms and superannuation product are less susceptible to changes that are significantly detrimental to their appropriateness to clients. Issues with product tend to evolve over time with cost being an example. As such these solutions can be reviewed on a longer term scheduled basis rather than requiring ‘ongoing’ monitoring. This goes similarly for existing insurance products however awareness of new products is required to ensure that a clearly superior product is not ignored because it is new.
Depending on the nature, scale and complexity of your business, and subject to your ongoing monitoring, it’s appropriate to review your Approved Product List annually (and practically, in sections on a quarterly basis).
Of course, you may make changes out of cycle as a response to, or in anticipation of, changing conditions.
The challenge for licensees is how to ensure that any changes are effectively implemented and operationalised by their advisers.
A licensee’s decision to assess a product as an “IMMEDIATE SELL” is often easier to decide than it is to implement at a personal advice level.
What do ‘Compliance’ expect?
Compliance will have different expectations depending on the organisation and the terms of engagement with the clients. Businesses should align their service agreements with the monitoring and reviewing of APLs to ensure that they comply with their agreement with the client.
‘Compliance’ expect nothing more than competent administration.
In fact, responsible Licensees often implement measures, processes and procedures in excess of the minimum requirements imposed by the law.
‘Compliance’ expect structure, consistency, clarity, transparency and good governance and these elements (with the avoidance of conflict) are what the regulators, and other stakeholders, also expect.
Who is Paul Saliba?
Paul Saliba is the founder and Managing Director of Evolutionary Portfolio Services, an investment consulting service that’s active and well-respected in the advice space.
Since the late 1990s, Paul has worked in investment management and research with ANZ Asset Management and Wall Street firms Citigroup and Credit Suisse.
In 2008 he began working closely with financial planning practices, planners and their clients in roles such as Chief Investment Officer of Lachlan Partners, Portfolio Manager at Mosaic Portfolio Advisers and Head of Equities & Portfolio Construction at IOOF.
In fact, Paul managed in excess of $6 billion at Mosaic Portfolio Advisers. At IOOF he was the investment manager for the Managed Account (and model) portfolios across the group with in excess of $2.6 billion under management.
In addition to his wide-ranging investment management experience, he has a Bachelor of Economics majoring in Economic and Econometrics, a Graduate Diploma of Applied Finance and Investment, a Diploma in Financial Services (Financial Planning) and is a Fellow of the Financial Services Institute of Australasia.
If you need help, he’s more than up to the task.