Vivid Financial Case Study at IBS

01/11/2010

Reproduced from IBS Journal - Wealth Management Supplement

When Sydney-based private wealth advisory firm, Vivid Financial, took to using Financial Simplicity’s portfolio rebalancing and modelling software, it sowed the seeds for a new financial concept.

Satisfaction must surely come in spades when an idea for a new business meets head-on with the technology that can make it happen. This at least is the experience of Vivid Financial, an Australian wealth advisory boutique that worked with fellow Sydneysiders and software vendor, Financial Simplicity, to create a new IT environment and in doing so laid the foundations upon which a new company was formed.

Coming a few years after the installation of the vendor’s platform, the new company, Implemented Portfolios, is a culmination of knowledge, experience and IT and is a perfect example of how a good idea needs the right tools, and vice versa.

Described as a portfolio construction and investment management company, Implemented has only been in operation since 1st June 2010. But it is already working with a number of financial advisory firms offering asset-allocation research, product selection and portfolio management around individually managed exchange-traded fund (ETF) portfolios.

Implemented’s strategy aims indirectly at the individual clients of these advisory firms who want to have more control of their investment portfolio and who seek an alternative to traditional managed funds and asset classes. The service offered to their advisors focuses on the investor’s individual risk tolerance and investment goal, rather than specific benchmarks. The knowledge that this approach requires, says Implemented’s investment manager, Jon Reilly, is something that does not come easily to the average spreadsheet-based financial advisor.

Reilly believes that most practices that start their own IMAs (Individual Managed Accounts) ‘don’t have the credentials to pick stocks or research companies’, let alone the capacity to keep on top of those portfolios to deliver the client’s requirements. So why is Implemented, as a small and very new operation, so sure it can do the job? The experience of the staff is a key part of it, Reilly explains, but he also acknowledges the vital part played by Financial Simplicity (or FinSim as it has become known in-house). Vivid’s experience with the system, and how it was deployed as a means to drive operational efficiencies and manage risk, is a major part of this story.

Vivid has been in business since around 1989. Reilly had been its trading manager for a number of years and had operational responsibility for its IMA service. ‘At Vivid we’d fine-tuned that IMA investment business based on an asset allocation process,’ he says. In recent times, mindful that industry colleagues had been talking about this kind of service but were wondering how to do it themselves, a plan was formulated. ‘We wanted to take this to the broader advisor audience,’ he states.

The portfolio services element was duly spun out to Implemented Portfolios with Vivid bringing around $AU80 million in funds under management to the table, effectively becoming its foundation client. ‘We also partnered with a business that has good knowledge and links with the advisory community in Australia, with a view to having other advisors let us manage their clients’ money through our structure.’

Reilly duly took up the reins as investment manager at Implemented, with some big individual names from the region’s investment community being lured in to form its Asset Allocation and Investment Committee, which now plans to meet at least once a quarter.

But Vivid realised that in FinSim it had more than just a good concept and contact list to spin off; it also had the means to execute that idea far more efficiently. Reilly admits that Implemented would struggle to do what it does without the help of the vendor’s tools.

The connection with FinSim, goes back to around 2006 when Vivid had deployed its Enterprise portfolio rebalancing and modelling software. With a growing business to manage, scalability had been pinpointed by Vivid as a potential stumbling block. Traditionally when modelling a portfolio back to benchmarks it would be done in a spreadsheet, explains Reilly. This, he says, was an intense manual process that was ‘prone to error’ with implementation of trades being ‘particularly difficult’ because there was no aggregation of orders. As a manual operation, the process ‘was not efficient enough to review client portfolios on any sort of reasonably regular basis’ Reilly complains. In the early days of Vivid, he recalls, it was just about manageable because the firm only had a small number of portfolios. But clearly if growth was to be achieved and, importantly, managed, such a limited set of tools would render the entire model as unsustainable. Indeed, the number of portfolios that Vivid’s team could review each day to enable the application of investment guidelines amounted to four or five at a stretch. Everyone knew that this was ‘nowhere near enough’.

'As a manual operation, the process was not efficient enough to review client portfolios on any sort of reasonably regular basis.' - Jon Reilly, Implemented Portfolios.

As expected, Vivid’s client and portfolio numbers increased, but so too did the risk that the firm was not maintaining its clients’ investment mandates or implementing their individual preferences. The lack of technology was, notes Reilly, rapidly becoming a compliance issue. ‘I got to the point where I had maybe 800 orders on my order pad; I’d probably be in a padded cell if we’d carried on that way.’

He knew that there needed to be a smarter way of carrying out the processes to assure the firm’s future (and his own sanity). Now was the time to seek that technology.

With the ‘clear direction’ that an in-house solution was not going to be developed, Vivid looked to the market to see if there was anything ready-made that could help. There were a few offerings that seemed to fit the bill.

‘By luck or judgement we came across FinSim first,’ says Reilly. ‘There were alternatives, but we never got to the point where we wanted to go down that path; it was more of a curiosity from then on.’ That curiosity led them to Iress Market Technology as a possible vendor. It had already provided Vivid with its eBusinessware electronic order pad, and now its portfolio and position management tool came under inspection. SS&C also proffered its snappily-titled Portfolio Management for the Australian Investment Management Market Suite.

But none seemed more fitting than FinSim’s offer. Based on his own experience and that of his industry colleagues, Reilly believes that although ‘the headlines can look pretty good, once you get into the nitty-gritty of it, a system can be a lot more cumbersome than promised’. He needn’t of worried, FinSim’s Enterprise suite ‘perfectly fitted what our need was at the time,’ says Reilly, following up with the acknowledgement that since going live with it ‘we haven’t had a reason to change’.

In fact, during the six week implementation project, only a few modifications were required. The suggested-trade output (a bulk trade export file, in FinSim terms) was customised to a format that allows Reilly to directly copy and paste into his Iress order pad without having to re-key anything. This, he says, ‘obviously cuts down on errors’. The trade export files were modified to include prompts that, for example, suggest when a price target is approaching or when income is about to be paid on a holding.

However, he says most of the implementation time was spent finding the correct data formats so the holdings files sent by the custodian could be consumed by FinSim Enterprise. ‘There were a few quirks we had regarding clients that had gearing within their portfolios,’ he notes. ‘We needed to do some number crunching to figure out what amounts were available to trade, based on set loan-to-valuation ratios.’ And where Vivid chooses to manage its portfolios using ‘floating weights’ (allowing price to influence what the model weights of securities and asset classes are), ‘a little bit of extra work’ was carried out to enable it to export client positions to Excel before updating and importing back into FinSim again.

Reilly also wanted to look at two different types of holding report: at a valuation level and also at a tax lot level. Tax lot accounting traces the dates of purchase and sale, cost basis, and transaction size for each security. This enables his team to apply portfolio rules to sub-sets of particular investments.

‘We take a couple of different files each morning and, using a piece of software developed for us by FinSim, we can convert those into a format that can easily be uploaded into the system. ’Other than that, Reilly says ‘it’s been a pretty standard release that we have been using for three or four years at Vivid’. And it is doing precisely what was ‘expected and required’ of it.

Of course, Vivid’s need for automated portfolio management went hand-in-hand with its desire to drive a more efficient operation and the need to meet the issues of scalability. But one of the foremost reasons for implementing this technology was an increasing pressure to keep risk under control; a need that was sent into the stratosphere when the financial crisis hit. From a licensee’s point of view – Reilly has Responsible Manager status – the buck stops with him. ‘The fact that [FinSim delivers] a full history means you can look back and see why you did something on a particular day. To have that information recorded provides peace of mind from a compliance point of view.’

However, it is the responsibility of Vivid’s custodian to maintain the history of all portfolio holdings and it is these that are used to perform the vital re-modelling process. The custodian sends related files to Vivid each morning so that a holdings report can be uploaded into FinSim. The solution performs the re-modelling (‘consistently and easily’ and ‘fairly seamlessly’) across hundreds of portfolios according to the pre-set rules for each one. It then aggregates and logs all proposed trades. This is where FinSim’s responsibilities end: ‘What I choose to do with that re-model is then entirely up to me and the investment committee,’ says Reilly.

Where the system has been rolled out to Implemented, ‘the process we have, related to FinSim, is essentially unchanged from what we have been doing at Vivid over the past few years,’ he explains.

'What we have built so far runs to about 350 portfolios. We believe we can just as efficiently run multiples of that with the same key staff that we have at the moment.' - Jon Reilly, Implemented Portfolios

As a new business, Implemented’s team has been talking to other advisors, with ten so far having signed distribution agreements extending AUM to around $AU100 million. Of course, each of these advisors are expected to talk to more of their own individual clients about the proposition, Reilly describing the here and now as ‘the calm before the storm’. In theory, he says, ‘what we have built so far runs to about 350 portfolios. We believe we can just as efficiently run multiples of that with the same key staff that we have at the moment.’ FinSim has been stress-tested to handle thousands of portfolios and, adds Reilly, ‘we’re about to put that to the test’.