Are managed accounts suitable for all?

The popularity of managed accounts does not mean advisers are unquestioningly optimistic about them with many worried about their value proposition for clients and the possibility that the market is not yet ready for all types of investors.

The recent Census conducted by the Institute of Managed Account Professionals (IMAP) with Milliman found funds under management (FUM) in managed accounts in Australia stood at $79.29 billion, as at the end of 2019. This represented an increase of $7.9 billion compared to the first half of the year. According to IMAP’s chair, Toby Potter, the increase proved investors’ confidence in their financial advisers had grown.

“Advisers are investing more clients’ money in assets through managed accounts. They provide efficiency for advisers and they really allow clients to get that multi-asset or multi-managed portfolio in a pretty convenient package that is already rebalanced periodically,” AMP’s head of platform development, Shaune Egan, said.

According to A Guide to Managed Portfolios published last year by AMP’s MyNorth Managed Portfolios and IMAP, the growth in managed accounts was expected to accelerate over the next three years as managed portfolios addressed key business challenges such as practice efficiency, optimising client outcomes, service differentiation and reducing operational risk.

However, managed accounts, despite all the benefits they offer, were still not suitable for all advisers and all clients.

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“If you look at the sort of adviser market more broadly, there are probably advisers who do not necessarily have the time or skills or the expertise allowing them to create their own multi-managed portfolio,” Egan stressed.

Meaghan Victor, managing director – head of SPDR ETF Asia and Pacific at State Street Global Advisors (SSGA), said there were three very distinctive points of managed accounts where planners struggled the most.

“Firstly, if we look at financial advisers and the adoption of the use of managed accounts, then for some people it’s about educational point. And 80% of potential users [of managed accounts] have said they would have basic understanding of the solution but they also need to understand how they can educate their clients. That’s probably one of the main barriers to entry that we see,” she said.

Secondly, advisers also need to understand how managed accounts or model portfolios could actually help them improve their value proposition for clients and, for that reason, advisers needed a better grasp on the broad range of benefits that managed accounts can offer by themselves to their practice, Victor said.

The third area was the ‘fear factor’ which represented the fact that many advisers were concerned around the possibility of losing control over their investment capabilities by hiring the third party.

“Outsourcing their investment management capabilities to the third-party provider is actually going to impact their value proposition but what we need to understand is that by outsourcing it is actually going to increase their [planners’] operational efficiency in their practices. It will allow them to have more time with their clients and therefore a change of the relationship and the focus they have from the value proposition from being investment driven to being client relationship driven.

“There’s a benefit for clients and there is a benefit for the financial advisers and we’ve done some research here in Australia, and financial advisers told us, that one of the key benefits for themselves is that it gives them an ability to focus on their business goals and spend more time developing that relationship with their clients,” Victor said.

SSGA’s study, which surveyed more than 1,600 financial advisers and investors in Australia, Japan, the US and the UK last year and looked at the alternative ways for Australian financial advisers to grow their practice in 2020, found that one of the top priorities for planners was deepening their client relationships.

However, according to SSGA’s Model Portfolio Solutions and the Client Experience Report and associated research, for advisers around the world, earning and maintaining client trust was the biggest challenge to growing their practices. While in Australia, 34% of advisers admitted that winning their clients’ trust was their greatest concern. 

“What that means is that outsourcing those investment management to the third party to be able to allow to spend more time with their clients would increase the efficiencies and would allow to build stronger relationships with their clients by sitting down and spending time to understand what their clients’ needs are,” Victor said.

The same study confirmed that despite advisers stating that their primary goals were to deepen relationships and acquire more clients, they currently spend more time on portfolio management (23%) than on either client-facing activity (15%) or prospecting new clients (11%). Also, day-to-day pressures which included time management were identified as one of the key challenges for one-in-five Australian advisers.

AllianceBernstein’s managing director of Australia client group, Ben Moore, said once again that managed accounts did not necessarily work for each and every investor and were of most interest for those who remained open to a conversation around their portfolios. At the same time, there would be investors and advisers who would continue to choose managed funds, he said.

“I think we are seeing managed accounts are not for everybody or for every client.

“There is no doubt that managed funds are more popular in the global equity space. And I think that’s for two reasons: one is more platform availability of the managed funds and number two is – there’s not as many advisers who are investment focused,” Moore said.

According to Moore, one of the key issues was a very limited number of platforms which offered the functionality to hold global separately managed accounts. “Netwealth, Hub24, and Praemium are the three that we do the most with,” he said.

As far as platform funds under advice (FUA) were concerned, managed account growth continued to outstrip of that in platforms’ FUA which suggested most growth was still coming from advisers who were recommending managed accounts to existing clients.

At the same time, there was a continuing trend from the last FUM census as at June, 2019  which showed that platform based separately managed accounts (SMAs) were growing at a faster rate and closing in on the managed discretionary accounts (MDAs) total , with the MDA category remaining the largest growing group after reporting a 6.5% increase in six months.

SO, WHAT’S NEW?

Speaking of the new trends, Moore said that a growing number of advisers have begun to look at external consultants, in particular the independent research consultants.

“We’ve definitely seen a bigger uptick in people wanting to use independent managed accounts – multi-asset managed accounts and we see the rise of the independent research consultants which can help understand asset allocation.

“When managed accounts first happened they were usually large licensees setting them up and collecting a fee from those managed accounts, whereas now we are seeing a lot more advisers prefer to get an independent research team to build those managed accounts and an adviser or the owner of the practice doesn’t want to take a fee from them, they want it to be separate from investments fees.”

SSGA’s Victor was of a similar opinion: “If you look at the US there’s been a very big support of the model portfolio for a long time, and particularly the third-party model portfolio. 

“We are starting to see more advisers in Australia who look at open architecture construct of model portfolios. So what I mean by that is when you look at the model portfolio – in the US it’s very open to the fact that the model portfolio is not made up of one asset manager but of multiple asset managers, and that’s where the open architecture comes from,” she said.

“If you look at it in Australia, that actual feature of the model portfolios is heavily resonating with financial advisers because there is a diversification.”

According to Victor, the two markets were also very different in terms of how they approached the high net worth (HNW) clients cohort.

“When we look at financial advisers in Australia – only 43% of financial advisers actually thought managed accounts were appropriate for high net worth clients, compared with the US where more than half of financial advisers work with managed accounts for their HNW clients – so there is an opportunity for the Australian advisers to look to the US to see how that has been adopted.”