Getting the right recipe for managed accounts success
It seems as though managed accounts have been gaining more and more attention in recent years, and rightly so: this type of investment solution can offer a great combination of flexibility, transparency and convenience that benefits both investors and financial advisers, hence their growing popularity.
But not all managed accounts are created equal. Particularly for advisers considering which managed accounts might be right for their clients, it’s important to understand the key ingredients for a successful recipe when it comes to creating a managed account solution. Getting that recipe right can make a genuine difference to an investor finding success in meeting their financial goals.
Despite their growing popularity over the last few years, managed accounts have been around since the 1970s, having been developed to accommodate specific (and often tailored) client demands that could not be met by a pooled managed fund. Whilst managed accounts marked their first entry into the Australian market almost two decades ago, hefty investment minimums meant that these structures were typically only available to wealthier investors for many years, leading to relatively modest growth in their broader adoption.
However, recent advancements in digital technology have given rise to the modern managed account, now more accessible, scalable and to be able to be offered at lower minimums and relatively lower cost to investors. These more efficient and effective products have led to a surge in the use of managed accounts with mainstream investors and advisers alike.
According to figures from the Institute of Managed Account Professionals (IMAP), funds under management in managed accounts stood at $71 billion as at 30 June, 2019, up almost 15% from $62 billion six months prior. Further, data from Sydney-based industry research
company Investment Trends found that the proportion of financial advisers recommending managed accounts to clients has doubled in the last five years.
So what are managed accounts and why are they experiencing such rapid growth?
BACK TO BASICS: GETTING THE TERMINOLOGY RIGHT
With the increasing number of advisers considering the use of managed accounts for their clients, it is important to note and understand the differences in legal structures.
Managed accounts is simply a general term that refers to a category of products where the underlying securities are owned by the investor, the investment management relies on the intellectual property of an investment manager and is professionally managed. The entity issuing the product is legally responsible for the trading, custody, and account level administration.
Separately managed accounts (SMAs) refers to the type of legal structure used i.e. a non-unitised managed investment scheme offered under a product disclosure statement (PDS). An investment is allocated across a ready-made model portfolio designed by the investment manager, which then determines the portfolio allocation of assets. SMAs are cost-efficient, transparent (underlying securities are held in beneficial ownership) and flexible (offering the ability to conduct in specie transfer holdings in and out of an SMA). If the portfolio is tailored exclusively for a client, then it is called an individually managed account (IMA).
Managed discretionary accounts (MDA) is an umbrella term that refers to a contractual relationship between an adviser (who has to be a MDA provider) and client where the adviser has full discretion to build, manage and implement client portfolios. The adviser trades on the client’s behalf using their own models or those of an investment manager, subject to certain agreed guidelines and limits.
BENEFITS OF MANAGED ACCOUNTS FOR INVESTORS
Unlike a managed fund where assets from multiple investors are pooled together, the underlying assets in a managed account are directly owned by the investor. The tax effectiveness of managed accounts is also another potential benefit to investors, where an investor may benefit from the tax advantages of a managed account structure due to beneficial ownership of the underlying assets as opposed to the pooled capital gains or losses in a single managed fund.
MOVING FROM PRODUCTS TO PORTFOLIOS
Advisers often make choices between strategies based on a variety of considerations related to their business model and client segments. We have observed a marked shift away from advisers being product centric and towards using managed accounts as an avenue to building holistic,
diversified portfolios for their clients.
Some advisers have adopted managed accounts as a whole-of-business solution, while others are using a combination of funds and managed accounts via platforms, and others choosing to implement portfolios off-platform entirely.
Some believe that managed accounts have helped enhance the client engagement experience and generate more value in relation to their advice process, especially with the more sophisticated clients who want to ‘look under the hood’ to see the individual components of the portfolio and want to be more engaged with reporting and transactions.
Managed accounts – especially those based on model portfolio structures – come with ease of access and administration, and users have typically found that the structure has delivered business administration and compliance efficiencies, with the average managed account user estimating that they save more than 12 hours weekly on portfolio management tasks such as administration, portfolio construction and implementation, and compliance. This has freed up time for advisers to focus on their clients’ more complex needs, such as estate planning, as well as providing advisers with more capacity to focus on enhancing their adviser value proposition and growing their business.
Depending on the investment manager and responsible entity, most managed accounts offer advisers and their clients the opportunity to access varying exposures of domestic and international equities and fixed income, to suit a range of client goals, risk tolerances and time horizons. Usually delivered through a model portfolio structure, the managed account strategies include strategic or dynamic asset allocation and broad diversification, as well as automatic rebalancing to ensure the portfolio allocations remain in place over the long-term. Costs, as well as portfolio turnover, are dependent on the underlying strategy and are generally higher for actively managed strategies, versus those being implemented using low cost and low turnover underlying index strategies.
We have also seen a growing trend towards advisers adopting and building bespoke and customised managed accounts for their clients. These however may increase compliance and investment burdens on advisers and their businesses, which reduces the benefits of model portfolio structures, and inevitably reduce time spent on important aspects of their businesses. Advisers may be better served to work with professional fund managers and assessing strategies that have truly stood the test of time.
THINGS TO CONSIDER WHEN CHOOSING A MANAGED ACCOUNT SOLUTION
So far, the benefits far outweigh the drawbacks, if any. But as with all financial products, not all managed accounts platforms and providers are created equal, and so it’s imperative that advisers know what ingredients they should be on the lookout to ensure they are selecting managed accounts that can consistently meet their clients’ needs.
1) Goals, strategy then structure
Deciding to use managed accounts in a portfolio is part of the implementation step of the portfolio construction process. Advisers should always begin with the client’s goals in mind and consider the investment mix and optimal portfolio structure that will achieve those goals.
2) Strategies backed by reliable and clear investment expertise
A key consideration for advisers when selecting the right solution is ensuring that the investment strategies are backed by the investment thinking that is long-term, enduring and provides the highest probability of a client achieving their portfolio objectives and goals. Advisers should consider if the investment manager is known for its investment expertise and if it has a consistent track record over a long period of time.
Advisers should assess the model portfolios and establish if the strategies are supported by research-led thinking and whether their philosophy and strategies are suitable for clients.
3) Seamless integration and user experience
Thanks to rapid advances in technology, managed accounts have, in recent years, become an accessible investment option via most notable investment platforms, rather than existing as stand-alone niche offerings that weren’t easily consolidated with broader portfolio assets.
A key consideration for advisers should be whether the solution integrates into existing technology and databases. The majority of managed account providers now offer advisers real-time visibility of transactions and portfolio composition, in addition to seamless whole of portfolio reporting and tracking. Another key element is the client interface that delivers the ability to provide clients with a view of their investments in real-time, which ultimately helps advisers assist their clients in understanding portfolio makeup and performance, and how they can factor that into meeting their overall financial goals.
4) Low cost
The discussion around the an optimal strategy often focuses on an optimal approach for investors to maximise their returns, however these discussions often distract from the one factor that transcends investment style or preference – cost.
The overall cost of a managed account solution should always be a key consideration, particularly as the market continues to be flooded with newer, more innovative products.
A fee structure for managed accounts can include costs such as an administration fee, a management fee, the underlying Management Expense Ratio (MER) if investing in funds or exchange traded funds (ETFs), a performance fee (for some actively managed strategies), and brokerage. Other providers may add transaction, custody and account maintenance fees. These costs vary widely across providers and should be checked closely as fees could eliminate the other advantages of a managed account. All other factors being equal, lower costs should translate into higher net returns and better performance for many investment portfolios. The less that is paid in fees, the more of what the portfolio earns stays in the client’s portfolio, where it belongs.
Ultimately, whether an adviser chooses to use a model portfolio for a client or to further customise a managed account, the key is to stay diversified, and keep costs low.
An adviser’s alpha
Managed accounts can play a key role in delivering what Vanguard calls Adviser’s Alpha – the potential additional financial benefits an adviser’s clients can reap through a focus on holistic financial advice and behavioural coaching. An adviser shifting their primary focus away from portfolio construction and management and towards personalised client goals can deepen and strengthen their connections with clients, and provide them with stronger outcomes.
Top-down portfolio construction and low costs
By constructing portfolios around broadly-diversified managed investment solutions rather than acting as a stockpicker, advisers can free up time to expand their role as financial guide and teacher. This approach creates an opportunity to help clients understand critical investment concepts and create plans based on their goals.
Behavioural coaching
Advisers can help clients to ignore market ‘noise’ by explaining how a balanced portfolio can withstand the ups and downs of the market over the long-term, which in turn helps investors recognise the value of staying the course as part of executing a well-designed financial plan.
Holistic wealth management
The key to an adviser differentiating their practice may be positioning themselves at the centre of clients’ financial lives, taking the time to gain a 360-degree view of their financial relationships and offering their practice as a hub for an array of value-added services. Clients view investing in terms of their life goals and depend on their adviser to be a trustworthy guide on their path toward these goals.
Demonstrating value
Through demonstrating the ability to act as wealth manager, financial planner and behavioural coach – providing discipline and reason to clients who are often undisciplined and emotional – rather than by efforts to beat the market, advisers can demonstrate significant value in their most powerful areas of expertise.
Demonstrating value for advisers will become increasingly important as the compensation
structure in Australia evolves from a transaction-based system to a fee-based, asset management framework. However, providing a well-considered investment strategy and asset allocation is as important as an adviser’s investment acumen and ability to deliver better returns than the markets. This can also lead to more referrals and less client attrition.
But advisers must do their due diligence in ensuring that managed accounts they might consider for their clients possess the right ingredients for success. By focusing on costs, seamless experience and reliable and consistent investment management expertise, advisers can be on their way to identifying managed account solutions that can be a valuable aid in improving client results.
Balaji Gopal is head of product strategy at Vanguard Australia.
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