Detangling managed accounts

Managed accounts (MAs) can provide clients with tax benefits, bespoke investment solutions and investment transparency while allowing advisers to cut down on their administrative costs – freeing up time that they can spend with clients.

In the past five years, MAs funds under management (FUM) have increased by $80 billion to $111 billion, according to the Institute of Managed Account Professionals (IMAP). And in the six months to June 2021, their total FUM soared by $15.8 billion.

But despite record growth, there is one thing getting in the way of further adoption: their complexity.

That’s why this feature will explore MAs, their usage in Australia and how they are continuing to evolve in the advice landscape.

Mat Walker, chief executive of Praemium, a MA provider, says MA growth has been driven by the numerous benefits they present to investors.

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“Managed accounts enable investors and their advisers to outsource the management of their investment portfolio to a professional investment manager, typically there is greater transparency of the underlying investment assets in the consolidated reporting of their investment portfolio and lower ongoing investment costs relative to other managed investments options, [such as managed funds],” Walker said.

“Advisers like enabling these benefits for their clients as it often leads to improved client outcomes and they can clearly and easily demonstrate that they are meeting their client best interest duty.

“Advisers also appreciate the advice practice efficiencies they can generate through the outsourcing of the investment portfolio management.

“Advisers can spend less time managing the client’s portfolio and more time on engaging their clients about their longer-term goals and plans such as strategic advice, lifestyle and event planning, cashflow planning, regular plan reviews.”

Patrick Jackson, Centrepoint Alliance’s investment solutions executive, says MAs have been getting more popular following the Hayne Royal Commission, as advisers start to understand that they have to become more efficient.

He estimates advisers spend about half their time on investments and that it made sense for advisers to reduce that significantly.

Peter Ornsby, Consultum Financial Advisers chief executive, says MAs provide active management in an environment that can drive down the cost of delivering advice.

“It reduces back-office costs, administration costs, it provides a great outcome in many cases for the client and if it’s driving down the cost of administering, then it’s driving down the cost to the client as well,” he said.

But Jackson says advisers need to be prepared to change how they view their value proposition if they want to become more efficient, a change that was starting to take place and leading to MAs recent growth.

“Advisers feel that doing that investment stuff is part of their value proposition to the client, whereas for me personally, if I went to an adviser, I wouldn’t think that should be their key priority, I’d think they should be concerned principally with what I was trying to do,” Jackson said.

“Budget, saving for holidays, estate planning, superannuation strategies, that's what I’d go to a financial adviser for - not to go and try and shoot the lights out with clever investment returns.

“So if you can access the skills and expertise of a Morningstar, BlackRock or Dimensional or whoever it might be, then you don't need to do all this stuff that you've been doing and you can focus on being more efficient and focusing heavily on the requirements for that client.

“It's just an absolute no brainer, and they will continue to grow.”

Jackson said the issue also came down to adviser and client education, which was increasing as more licensees became more familiar with the types of MAs.

EFFICIENCY

When client’s portfolios go out-of-whack as asset classes grow or shrink, advisers will rebalance it through a series of switches, triggering an onerous process of records of advice documentation.

Managed accounts take away the advice documentation, sometimes, but not always, sacrificing ongoing adviser investment decision making.

And it does that through several structures as Tristan Bowman, director of investment management at Cameron Harrison, explains:

• Separately Managed Account (SMA) – a portfolio of direct shares managed on behalf of investors, typically with no or little investor discretion on inclusions/exclusions and invested according to a manager-constructed model portfolio.
• Individually Managed Account (IMA) – a customised SMA where the portfolio manager constructs a portfolio individually for the investor taking into account client risk tolerance, tax considerations, preferences and objectives.
• Managed Discretionary Account (MDA) – an account where the portfolio manager can tailor the investment process to modify the portfolio to match the investor’s goals and risk tolerance, with consideration to tax outcomes but requires a contract under which the MDA operates. 

“Which type of managed account is appropriate depends on the client’s financial circumstances; the higher level of customisation of IMAs and MDAs will potentially be more suitable to those with complex needs or objectives, albeit there will be additional costs to those services as compared to a SMA. Essentially, the decision will depend on the level of complexity in the client’s circumstances,” Bowman said.

PLATFORMS

Platforms represent the next level of understanding managed accounts.

The Australian Securities and Investments Commission’s (ASIC) Regulatory Guide 148 (RG148) defines platforms to mean investor directed portfolio services (IDPS) and IDPS-like schemes.

IDPSs hold and deal with one or more investments selected by investors and are unregistered managed investment schemes, meaning they are not registered on the ASIC website. 

They are managed investment schemes because investors have the expectation of cost savings (e.g. through the netting of transactions or the pooling of funds to acquire investments) or access to investments that would not otherwise be available to them.

IDPS-like schemes, on the other hand, operate similarly to IDPSs in that investment decisions are generally made in accordance with specific member instructions, but they are registered with ASIC.

Jackson says Centrepoint Alliance uses Ventura Managed Accounts Portfolios (VMAPS), an IDPS-like scheme.

According to Jackson, an IDPS-like scheme sits somewhere between a managed fund and an IDPS, providing access to hundreds of managed funds or shares in a professionally structured portfolio.

He says the investment is done through a professional manager like Morningstar or Dimensional where users get a share of the scheme and benefit from the diversified managed account.

TAX EFFICIENCY

Research conducted by platform provider HUB24, in collaboration with Milliman, found an investor switching between three managed portfolios of Australian shares on the HUB24 platform over a 10-year period would have outperformed comparable managed funds by nearly 10% or $20,847 assuming an initial investment of $100,000 and tax rate of 47% (45% + Medicare Levy), or $7,157 assuming a tax rate of 15%.

The outperformance was attributed to a technological function on the platform which allows only shares not held by both portfolios to be bought and sold, minimising capital gains tax and transactions costs.

Brian Long, Lifespan Financial Planning senior investment specialist, said: “When you want to change investment managers, rather than selling down all the holdings in the portfolio which is what is required when using unit trusts (managed funds), you can simply appoint the new manager and they will rebalance the portfolio to bring it into line with their portfolio which will generally result in fewer buys and sells, resulting in less tax and transactions costs.”

ADVANCES

AMP’s director of platforms, Edwina Maloney, said execution was often overlooked.

“Buying or selling assets is not deemed as important as the assets themselves – this is likely true, but more efficient technology is helping to reduce trading costs and minimise risk, which can deliver better performance outcomes for clients,” Maloney said. 

“Contemporary platforms allow managers to buy and sell listed securities and managed funds simultaneously.

“This reduces time out of market risk and improves efficiency which ultimately has a positive impact for clients.

“More efficient trading systems also help to reduce broking costs and allow platforms to bring smaller trades to market through the use of fractional holdings. This helps to make managed portfolios more accessible.”

Maloney said there was a trend towards a more integrated and end-to-end advice experience.

“Traditionally, platforms have been execution engines, helping advisers execute their advice strategies, but with a greater range of decision support tools and modelling, platforms are now helping advisers form strategies, prior to execution.”  

OUTLOOK

Jackson’s only concern is the fear of oversaturation of MAs, particularly that there may be many different SMAs run by small licensees.

“So lots of licensees might build a managed account when they don't necessarily have the expertise and this is just a slight concern because we're going to end up with 1000s of these things if we're not careful,” Jackson said.

But he said growth will accelerate as people gravitate towards the use of professional investment managers.

Ornsby said due diligence on the appropriate structure of the MA and its ongoing management was paramount.

“When there is a change in the market, who’s reviewing the portfolios?” Ornsby said. “And some are more costly than others, so you’ve got to do the diligence around cost versus value.”

He said there had also been a number of distractions in the industry from a regulatory point of view that had slowed the take-up of MAs.

“But we are starting to see an escalation in the take up because people are starting to see that there are more options out there from a platform perspective,” Ornsby said.

“We’re moving to a stage where so much of the regulation coming out of the Royal Commission has been implemented at the licensee level, businesses are starting to focus on the business.”

Long said MAs will continue to grow simply because they reduce cost, increase efficiency and transparency, and generally improve the portfolio management experience.

“In an environment where cost pressures are everywhere, these factors become so important,” he said.

Maloney added: “The challenge is to educate and support the advice community as they embed them as part of their advice proposition, and so they can in turn educate their clients”.