A discussion with Peter Turback about how Financial Simplicity really helps out those responsible for compliance on portfolios

 

 

Stuart:
Welcome all. Today I’m delighted to be joined by Peter Tarbuck from MDA guru Peter and I have known each other in the investment industry for some time. And as for the title of MDA guru, you can probably guess that Peter has a considerable amount of expertise and knowledge in the area of running, MDA manages discretionary accounts, particularly from the perspective of being a responsible manager. So today, we’re going to talk a little bit about some of the issues that responsible managers face, and how financial simplicity helps them deal with that, ultimately, provide better outcomes for firms who can provide better outcomes for their clients. So welcome, Peter.

Peter:
Yeah, thanks. Thanks for having me. And happy to go through your system I have already in the past, and I absolutely love it. And there are a couple of very good reasons why I do. The main one being is that I can actually help keep my clients fees down if they use a system, like yours. And just to be upfront, I haven’t seen anybody else that can do it like you so and particularly in the area of compliance and making sure that advisors are adhering to their mandates. So that’s why I’m here today, just to shout out and think this is fantastic. And I love to be able to tell other people in the same situation as me. Other RMS, how, how useful this tool can be. Let’s go pick

Stuart:
First, before we show the system. When do you want to just describe what some of the challenges are that are in somebody’s in your professional position, my trade? My, the some of the challenges you have in the work? You do?

Peter:
Yeah, so specifically to the portfolio management and of things other than other compliance areas, whether or not advisors are doing the right things for the clients conflict of interest, best interest duty, but put it that aside, let’s look at this, the technical and the perimeters of investment program building and adherence to that investment program. Maybe an investment committee level and the main areas that we sort of focus on is portfolio drift from their asset allocations, or if it’s a thematic style portfolio, and they’re supposed to have a certain kick sector in there, and it’s out of whack from its kick sector ratios. And then, in either situation, I’ve noticed that too, like yours can come in very handy because of the way it filters. So, you know, just from pinpointing that challenge is where I think, you know, we’ll go today with.

Stuart:
Yeah, Peter, what is some real perspective? Should we bring up the system? And you can talk us through what you like about it, and how it helps you with those types of activities?

Peter:
Yeah, yeah, just throw it up. And we’ll have a look and see if we can point out some instant benefits.

Stuart:
Okay, great.

Peter:
So, this is what I love right away. And this gives me such a quick look at an advisor, client group, and how their portfolios are adhering to the mandates. It is so simple; I do not have to go in and draw will explain.

Stuart:
It is what it is, Peter.

Peter: Absolutely.

Stuart:
Yeah. So, for the audience here, this is, is what we call portfolio compliance. heatmap. And when we say it’s a heat map is, is because it’s a map of any colors, things differently. Now, every box on this heat map represents an individual client portfolio that has its own, either what we call compliance mandate in terms of asset allocation limits, or also and or it has mandates which can be how models or mixtures of models or multiples of models, and individual ents rules, preferences and constraints. And what it’s doing here is just basically monitoring all of the individual client portfolios against their own individual compliance rules or own individual mandates. And the colors are fairly self-evident. Green means it’s entirely consistent with what’s been sent out by the firm by the advisor with the client. Red means it’s gone out sufficiently that it needs some attention and yellow means it’s in what we call a warning drift limit stage. So that’s what we’re seeing in front of us. Back to you.

Peter:
Yeah, So any other systems where I have to check the mandates against their actual holdings, I have to go in and draw reports and then marry it up almost one client at a time, or you take a subset of clients, the balance client, a defensive client and, and draw report and check against their, their mandates and, and sort of hope that the rest of the clients are in a similar way, it’s kind of impossible to see a helicopter view, you can draw obviously a report before you want to do a rebalance and see what needs to be rebalanced. But that takes time. And then you have to, you know, go through that report as if you’re doing a rebalance, just to see if it needs it. So, the benefit of this is, that it alerts you where, and where the attention is needed. And that’s the main point of difference is when I have to do something to get that information or use this where I get alerted, to the where the attention where the issues are, that’s a huge time saver. Huge. And I change my fees, I can charge my fees according to somebody that’s using this and I can use that to do my job versus having to draw reports, and spend half a day doing that to check.

Stuart:
Number one, quantify that I mean, in terms of what sort of X time savings does this give you? Is it 10 times faster, or, you know, try and get some sort of quantification on how much benefit it provides?

Peter:
Yeah, so it could, it could easily be 10 times faster. However, that’s if, if you’re using models, then the benefit is, is not as large as if you are using IMA’s for your clients. So the challenge is holy grail software to be able to do IMA’s whereby urinary over every it’s in there sorry, every client every investment program, and to be able to have what you’ve built with the flexibility of how you can set each client differently, then and then at alerts against that its own mandate. I wouldn’t be able to run, oversee, you know, 100 IMAs, and in a day, it would be impossible to check each one to make sure that they’re in their mandate because they all have a different mandate. So you’d have to draw a report for each client. But this they could have, you know, 400 IMAs here. And the filtering allows for an alert system that tells you hey, this one needs attention. It does. You don’t have to draw that report. So there’s the benefit if you wanted to run IMAs with scale, and have compliance oversight over it. It’s totally possible with this. And that that’s the true benefit that I see.

Stuart:
So that’s great Peter, and so in some of the people. So, the phraseology we hear sometimes is detected controls and preventive controls. How does that sort of fit into your nomenclature and terminology in the work you’re doing?

Peter:
Well, it just drives costs. So and, and the amount of work that you have to do to get your answer. It’s that simple. If you know, other than, you know, people might say, well, it looks great. It’s bells and buzzers and whistles. And that’s a lot of add-ons and technology that may be redundant or not necessarily necessary. But this tech is just exactly to the point and keeps it simple, stupid, yet behind the scenes very complex. So to be able to make something that’s very complex behind the scenes, but gives you very helicopter oversight of all those independent portfolios. is what I find incredible about

Stuart:
Are we sure we are sort of hitting some of these squares and zoom in a bit?

Peter:
Yeah, I guess just shows have a look. So we can see right away that there’s probably a bet in that portfolio of about four or 500. You know, there’s about 1010 there that I read. So did you hit a one that’s in whack or at a lack? I didn’t say,

Stuart:
I went to one of the red ones here. Yeah, storming into it. So he’s, he’s read for some reason. And what the software provides, when you zoom in in more detail, it will either tell you if it’s outside any of the, what we call the compliance ranges, or whether it’s sufficiently deviated from its mandate that it needs some remediation. So this is one example of that, I might just go back to show a different one as well. Where it’s not that one, what I might do is just actually just tick that box off there and show this one here. So this portfolio, we’re just texting for what we call compliance. And this is going to show you in this particular case, it’s breached its rules in terms of investment density. It’s, as the lowest was actually meant to be 1%. But as actually an investment that’s even lower than that. So that’s breached. It’s what we call firm-wide compliance. But if we test also for the mandate, compliance, and zoom again, we can see not only testing for firmwide compliance, but we can see here that there is sufficient deviation from the portfolio that is outside its drift a limit alerts from a mandate perspective.

Peter:
Yeah, so what’s the difference between the inner circle and the outer circle, then which one is which one’s actual and one is the mandate?

Stuart:
That’s right, Peter, the inner circle here is the parent portfolio composition. The outer is actually the mandate that’s been agreed with the client. In this case, it’s a mandate that’s based on a model portfolio, and probably taking into account a few other clients rules and preferences on the top of that, at the same time, so it gives you a visualization of a donut is current out of donor has actually what’s been agreed with the client, not just the model, but the model taking into account client rules on top of it.

Peter:
So I can see here, that there’s too much green and not enough red. So what does that actually mean?

Stuart:
Yeah, so what that translates to over here, on the right-hand side, we can see where essentially, some investments are significantly underweight, or significantly, or, or partially overweight. So probably the deviation of this Woolworths being so significant is the reason why it’s a red trigger, which is basically, we you can define basically, how much deviation sets an orange or a red trigger, in this case, that’s sufficiently deviant, that it said, that’s outside the limits of acceptability that this firm wants to operate. And therefore, it’s red and alerts, the advisor, the portfolio manager, or the responsible manager, as to the deviation and therefore creates essentially a call to action. Let’s do something about them.

Peter:
Yeah, yeah. So what would be the next step, then? For you, as the advisor, in this case, to rebalance, not just that client, but all the clients that are showing red?

Stuart:
Yeah, so let’s do that in that particular order in terms of this one that’s in front of us right now. Financial simplicity has a capability here where we can essentially do what we call a one-click to rebalance. And a one-click rebalance will basically do all the computations into essentially what’s the equivalent of an online spreadsheet, but it computes all the buy and sells orders, as you can see here, which will bring that portfolio back into its mandated state. So it’s shortening or removing the drift deviations by executing these trades. And so a lot of our advisory clients will take this information, and they may generate on the fly, essentially a record of advice or a portfolio review for their client. It does this basically, as you can see here, in a matter of seconds, we can go from a red square, identifying a non-compliant portfolio, we can see some deviations, some proposed portfolio metrics, and whatever else that the firm wants to put into that document. But essentially, by doing that, we can remediate. So, what we’ve gone through there as we’ve looked at the heatmap, the red squares alert, a detect control, and we’ve then undertaken a workflow to remediate that or at least propose to the client to remediate that. Or if they have discretion, they can just execute the trades themselves. And what we will see then tomorrow, is when the trades have come through those squares will go from red to green, and the ideal state for me firms is a very green, very green heatmap. Becoming coming back to your other point about if we go back to the heatmap. Again, if we go back to the heatmap here and say we’re running a discretionary business, and we want to, we want to review not just one portfolio at a time and look at the trades, but we’ve got discretionary authority, then what we can do is hit rebalance investors. And what it’ll do is it will list out all the portfolio’s that are outside their mandates. And with one click of the button, we can seek to skip that. That’s just a little warning. But what we can do at one click of a button, is essentially do all those calculations for each individual client portfolio, all at the same time, to essentially generate what we call a whole load of pre-compliant portfolio reports. But we can see here, that these little traffic-like indicators indicate that these were red or yellow in the beginning and become green compliant afterward. We can see the number of buys and sells and valuations. Anytime we can zoom in as we did before to see all the details of the calculations from an audit and compliance perspective. And what I’ll often have on our clients who have that sort of discretionary authority, too, is they might, they may see to check all the investor rules in cases and a client-specific stuff. But then ultimately, they might expect folk’s portal that orders into their trading or platform systems. So essentially, one execution of that, hopefully, the next day, assuming the markets and the models haven’t changed significantly enough, they’ll end up with a very green heatmap, which brings all the portfolio’s in line with the client’s expectations, which is their best interests, reduced business risk.

Peter:
That that’s fantastic, Stuart, I just have a question. If a portfolio is at a balance, is there any way on your system to determine how long it’s been out of balance?

Stuart:
Apart from the logging that we have in the system today? It looks like we just go back to our heatmap. So, where we’re at the moment is that? Essentially, it’s a red to confirm that. But some of the things that we’re working on, is to make the read different shades of red, depending on how long it’s been red. So therefore, just give a level of accentuation to the person who’s using the software to know is it being read for a day, which might be just short-term market fluctuations, always been red for a long period of time? Yeah.

Peter:
So if a portfolio, in my opinion, is out for, let’s say, a week, and it’s a bit between, let’s say, two, growth ETFs. And we have an ETF portfolio, let’s say, and each ETF or the ETs are representing basically asset classes, like how they do it in the road vice world. If there were to, let’s say, growth ETFs, apart from each other, that’s out of whack. From a compliance point of view, I’m like, okay with that. But if, if it’s a defensive ETF versus a growth ETF that’s at a whack from each other. And that could change the investment profile, or the risk profile of that client from, let’s say, a defensive client and step them up and do to the balance type client, then I have an issue. So I’m trying to find, you know, something that, that I the only way now I that I do it on your system is, is to set up the filters, so that it you know, if it’s up more than 10% or 15%, then it gets red-flagged. And, and if it’s within that I’m okay with
it. So I’ll just stay as long as it doesn’t change. And I’ll know those parameters when I set up the portfolios where it will change. So I’ll just shade below that. Once it goes over and it’s red. In my mind, I know that that’s now portfolio is out of balance. And that’s a risk issue. But if there wasn’t some sort of time mechanism, then I could make those filters a bit smaller, and keep the clients more in tune with their portfolio. Do you know what I’m saying there? It just made me help, but it’s obviously not the end dollar bill because it’s not a workaround. It’s just a matter of setting the filters the way it is now. But it’s either in or out. Yeah,

Stuart:
Well, we do with I mean, so there’s, I think there are two things there. And you know what two things there. One is, one is how to set up the monitoring. And what I’ve just brought up on the screen here is, you know, some of our clients, they, they do exactly what you’re suggesting, they just want to monitor the ratio of risky and defensive assets. Yeah, so what they set up is what we call a compliance template here. So they might put, a minimum and a maximum allocation for each type of asset. And they may put what we call an alert on there as well. So an alert is basically where it goes orange in the heatmap. So green is if all the assets are fitting within these bands. Alert is if it’s extending that way, and red is when it goes outside there. So they can actually set the minimum-maximum allocations. And they can also actually say, minimum maximum allocations for any particular investment, that’s more about the density of portfolios. So that’s the way they can set these parameters up. But then for each, each portfolio that they have in their book, they can choose every individual portfolio. And I don’t think I’ve got one particular for that case, but let me just choose one here, Mr. Warren Buffett is a very known investor to everybody. But what they can do is they can set a compliance template for that. So in this case, here, we were talking about defensive growth, we can change it to that if we want to. And that means now we’re monitoring for defensive growth allocation rather than whatever we had before. So that’s, that’s, that’s a way in that particular case of the defensive growth. But the other thing that we find clients do coming back to your question about monitoring for timeframes is we have this very flexible tagging capability. And so, we can create tags for, say, creating a tag for a client that has been out of or in the red zone for a week, for example, or you can create a tag saying been in red for the month or been in red for over three months. And so just by a simple process of tagging, I mean, there are not those particular examples, but we could create those tags. And by doing that, that means our clients can basically go back to their list of investors. And they can sort and slice and dice their client base by these tags. So if I go to investor category, and I want to look at just the clients that are discretionary, for example, then I can just hit that tag, and it will get like that. So if we can imagine that tag was portfolios have been out of compliance for over a week, then it just lists with portfolios that are outside for the week, and so on. So it just helps our clients organize. And ultimately, in your scenario, you’re just trying to find the high-risk portfolios, the portfolios that are outside their mandate for a long period of time.

Peter:
Yeah, but that’s perfect. That’s all you need to do. You know, everything doesn’t have to beat that helicopter view, you’re always gonna have to draw down into a report somewhere. You know, and, and obviously, this can be done at the dealer level, let’s say there are five advisors, I can and each one has 100 accounts, I can look at that from the dealer hierarchy.

Stuart:
That’s Rapada. Yeah, the way the technology is built is that you know, in some firms, everybody looks at every portfolio, but in some firms, each advisor got their own ring-fence books. So so when the data is uploaded, it can sort it into each advisor folder for lack of a better phrase, but then also the responsible managers or the people with oversight can actually see the whole business and therefore assess the compliance, the risk of the overall business at the same time.

Peter:
Can you just go back to the heatmap? For one more second, please? Sure. So, you mentioned earlier and I think we’re just going to reaffirm coz we skipped over right at the beginning. And then, as we delve down, we spoke about the different ways in which this looks at the portfolio. So we can set it up to look at it from a defensive growth-oriented with those filters. Or let’s say, there’s no lack of cash, you know, there’s not enough cash. And that’s a different type of alert or way to look at the portfolio or there’s a wrong investment in there something so just show can just show us where that gets done quickly to revert between the two.

Stuart:
So sorry, Peter it just, I’m not sure about you that

Peter:
Okay, so we you said before There’s the mandates section. Yeah, where you can check against the mandates that you’ve put in. So, what’s the other section then? Which is where I guess you could put in something with regards to not being enough cash? In the cap? So, yeah, I think you can toggle back and forth the look of the portfolio depending on what the filtering is.

Stuart:
That’s right. So if we flick both of these things off, then naturally, what happens is the heat map goes gray. And then if we want to test for things like defensive growth mix, which, then that’s what we call the compliance testing, and testing that’s testing the ranges. So if we come back to our example here, is testing the ranges or the other rules of density here? Yeah.

Peter:
And do you want to look at some of those rules that you can build in? Is it? Is it too many to look at? Or is it one of the key ones that you can do that, you know, people will want to be able to know how to do and this?

Stuart:
Yeah, let’s just choose this client portfolio here. So in this case, here, we’ve I’ve just chosen a portfolio. And we can see, there’s a bit of red here because it’s outside the acceptable bands. And it’s also outside acceptable cash limits. Now, we always have the opportunity to do what we call a report. Now, I might screenshare, I might have just lost you. So let me just re-screen share here. Standby. So in its screenshot here, as we zoom into this report, you can see that the report will identify a whole range of things where it’s deviated from. So in this case, here was, you know, Australian Equities is outside its range. It’s meant to be between currently 46%. And it’s meant to be between 50 and 80%. So you can see wherever it’s read it is deviated from the mandate. But there’s also saying here that some other things like it’s not only the categories are out, but the cash is above its maximum holding level. Get rid of that and go back to actually the compliance report template itself. We were talking before about defensive growth. That’s one way of doing a compliance team. Another way is to pay is more just asset allocation ranges. But in addition to our allocation ranges, we’ve also been able to be able to test for things like you know, the number of investments in a portfolio, sometimes firms want to make sure there’s sufficient diversification. And so you might set a minimum-maximum range on that minimum-maximum range on cash. And also where people have API calls or approved product lists, they might want to be alerted if any of the products I’ve got a sell rating on them. And so the responsible managers can keep oversight of that as well. So there’s a lot of things that are going on inside that, that test here that ultimately you can get at the click of a button. Each time there’s a red square when you are alerted, so which you can do every day.

Peter:
Yeah, now that that’s fantastic. I love that, you know, where you can put, your approved product list. And as you said, if there’s a sell, then it’ll automatically alert all the portfolio’s that that investment is in that portfolio needs to be dealt with.

Stuart:
That’s right. So what we’re aiming to cover here is a combination of product rating in the approved product list, asset allocation as a concept, and the concept of then tracking to the models with rules on top of that as well.

Peter:
Yeah, yeah. So I think you know, that that covers what I love about it. Um, and you know, it’s just so easy for me to do my job. Yeah, that’s all I can say.

Stuart:
Yeah, that’s, that’s certainly the certainly what we’ve designed it for Peter. So your commentary around that is wonderful to hear.

Peter:
Yeah. Yeah. I’m a big fan.

Stuart:
Great. Well, well, thanks. Thanks. Thanks for having a chat. As for the audience here. Hopefully, that gives you an understanding of the benefits that it gives to the people in the responsible positions of portfolio oversight. And Peter, thank you very much for your commentary and for sharing some of the things that are important to you in the way you do your business today.

Peter:
No problem, Stuart. Thanks for having me, buddy. Cheers. Cheers, mate.