Buyside view: from brokerage to advisory – shifting the focus

After more than 10 years in different roles at UBS Financial Services, Michaelangelo Dooley (pictured) moved to US registered investment advisor NewEdge Wealth at the beginning of 2022 with the vision to change some of the ways of the industry and how to use structured products.

Investment platforms wanting to offer advisory based structured notes have historically come with challenges - Michelangelo Dooley

The launch of the NewEdge Structured Note Strategies back in the summer, which is part of the firm’s NewEdge Investment Solutions platform, is testimony to that vision as it is aimed at going beyond what most financial advisors are trying to do in the US market.

In the US, most structured notes are primarily consumed by financial advisors as opposed to retail clients, notes Dooley, adding that most of the structured note exposure over the last seven or eight years ago was brokerage based with hardly any advisory-based structured notes usage - everything was still brokerage, commission focused.  

“Investment platforms wanting to offer advisory based structured notes have historically come with challenges, especially if those advisory accounts contain 100% structured note exposure as our strategies do,” Dooley told SRP.

“Advisory account compliance requirements such as minimum position numbers, single position size concentrations, issuer concentrations, underlying restrictions and note type restrictions all create barriers to entry for platforms and advisors to offer structured notes through advisory platforms rather than brokerage ones.”

This approach had significant flaws, both on the types of outcomes that investors were receiving from those commission-based products, but also in the way that advisors were selling and managing those products.

According to Dooley, the US market has been characterised by a huge disconnect as products were being pushed as a single product which not only was not ideal in outcomes, and a significant number of those advisors didn't monitor those positions on an ongoing basis  which was also exacerbated by how much time it was taking for advisors to have to manage those products - selling it, rolling it.

“It became a sub part of their practice just to have to do structured notes,” said Dooley. “It became clear that there was scope to improve advisors’ practice around structured products and scale it and that we could do this better within an advisory discretionary strategy.

“Structured note data transparency continues to be a hurdle on many platforms, though we have seen meaningful progress in the past decade with many platforms spending more time on transparency and reporting within structured notes.”

Time to switch

In his previous role as a private wealth advisor at NewEdge and before the NewEdge Structured Note Strategies group was launched, the firm primarily had two types of clients: the high-net worth client base - anybody that was up to US$20-US$30 million in assets under management; and the ultra-high-net worth and family office clients.

A couple of those ultra-high-net worth family office clients would run structured note auctions that would help them figure out pricing, underlyers and payoff structure with transaction sizes that ranged between US$10-US$20 million per trade, said Dooley.

“We would run comprehensive auctions that led us to see the difference between the product that an ultra-high net worth investor would get versus the type of product that was being pushed either directly from the issuers or through the bank distribution networks to advisors - the delta was massive,” he said.

“Some of that has to do with brokerage versus advisory product, but unless you had US$1m the investor would be buying off the shelf.”

Portfolio approach

The concept behind NewEdge Structured Note Strategies is based on combining the buying power and the same type of execution that these ultra-high net worth investors are getting, but also on making it easier for the financial advisor, “so they don’t have to dedicate a sub portion of their business just to manage a structured notes book”.

“We think this approach ultimately provides a better process as it is not based on a one-off trade, but it is considered a piece of your asset allocation with the intention of doing something that traditional bonds and stocks aren't going to be able to achieve,” said Dooley. 

That is how the first iteration of what is now NewEdge Structured Note Advisory Portfolio, also known as SNAP, originated in 2018.

Looking back - inside UBS

Initially, SNAP was just a transition for the firm’s book of business which had about US$500 million of structured notes of which US$200 million or so was brokerage that they knew it wasn't going to transition; the other US$300 million came from clients that were happy to delegate the management of their portfolio to NewEdge as they could see the execution benefits.

“That's where the strategy began - it was fuelled by all of our brokerage notes that were rolling off which help us build a discretionary track record over time,” said Dooley.

In about two to three years after it started - between 2019/2020 - NewEdge had advisor partners at UBS without the Swiss bank formally recommending the strategy.

“UBS had just gone through a series of client complaints resulting from a financial advisor led options strategy, which was not related to structured notes in any way, but minimised the firm’s risk appetite to support what we are building in a formal way,” said Dooley.

“As much as they loved what we did with the structured note advisory portfolio, they couldn’t or wouldn’t adopt it for broad use across the advisor platform, leaving most advisors to continue structured note usage through brokerage (commission) based notes.”

The challenge on any of the wire house platforms, according to Dooley, is how to create risk parameters within an advisory portfolio.

“This meant that they couldn’t have more than x percentage of an issuer in a single account; or they could not do more than 30% to a single issue structured note in this account,” he said. “The advisory account compliance rules made creating, managing, and sustaining an advisory portfolio of structure notes very challenging for any advisor.”