Going solo

Individually managed accounts (IMAs) have been touted as the next big thing in financial services for a number of years. Admittedly, nobody knows exactly how many funds under administration the various IMA managers have, but the consensus says they are still short of the targets projected a few years ago.

US success story

The original assumptions were based on the success of IMAs in the US, but that hasn’t translated to the Australian market. Macquarie Financial Services Group associate director James Embelton, who has worked in Canada managing IMAs, says comparisons are wrong. “We should be looking at Canada, which is a reasonable proxy to Australia, rather than looking at the US,” he says. “The demographics of population in Canada and Australia are the same.”

However, it has been the links between US and Canadian financial services companies that have smoothed the introduction of IMAs into Canada. “Having had the US IMA being so successful, a lot of US-owned companies in Canada took the model across the border,” Embelton says.

“These are brokerage and financial planning firms working together, and they often have more than 1,000 advisers to make IMA offerings.”

The Aussie experience

Asgard director product Dean Thomas believes the sophisticated funds management industry in Australia is a reason why IMAs have not achieved the same growth as in the US. “We haven’t seen that uplift in Australia like in the US, mainly due to the managed funds industry here, which is very developed,” he says.

“Clients still go to managed funds as there is more knowledge of managed funds by advisers, and that has limited the use of IMAs.

“But advisers are becoming knowledgeable about these products.”

The market conception is IMAs are new products shipped in from America, but in truth they have been around for a long time — in fact, since 1888. EQT Funds Management general manager Harvey Kalman says trust companies have been running IMAs for years.

“An IMA is a wrap, and the only question is how you manage the portfolio management system,” he says. “Trustee companies can help manage affairs while the adviser runs the client.

Kalman says his company has the capacity to put any type of asset in its IMA. EQT calls its IMA Portfolio Manager, and the company offers three levels of service — custody, advisory, and total care.

“Custody is where we are holding the assets of the client,” he says.

“Total care is where we do everything, and that includes making decisions on behalf of the client and the investing.”

The third service is advisory, where EQT gives the advice and the client makes the decisions.

“The reason why the product was created is that it will go through the life of the client with different services,” he says. “We can do whatever the client wants to do, and we can work with the financial planner to help them run the affairs of the client.

“If they put EQT in as the trustee, we can still leave the adviser running the affairs, and they can add value.”

Kalman says Portfolio Manager is not a product, but a service that adds to the growing lists of variations in the IMA market.

“It is the personal form of an IMA. While the client makes the decisions, EQT handles the administration management.”

A virtual offering

Another variation of the IMA is Financial Simplicity’s virtual IMA, which is designed to bring together the components of a tailored client portfolio with the ability to deliver this to a mass market in a cost-effective manner.

Financial Simplicity managing director Stuart Holdsworth says the company started seven years ago to issue mass tailored and individual structures for clients.

“A lot of fund managers are offering square pegs in round holes,” he says. “Fund managers do offer IMAs, but they still have the philosophy of a managed fund, whereas we have a client-centric approach instead of a product approach.”

Holdsworth says the challenge is to create a client-centric approach in the IMA model that will deliver scale.

“The problem of procuring shares and the challenge of business processes achieving scale are the issues,” he says. “Although many companies offer the service, they don’t have the scale.”

Financial Simplicity administers the risk of an IMA operation with a scalable business structure. Holdsworth says he hasn’t seen fund managers embrace this type of structure in IMAs.

“What is needed is a fresh approach to the problem of running IMAs for the mass market,” he says.

“Financial Simplicity provides a solution to institutions, dealer groups, and individual clients on how to manage more individual portfolio products.”

Holdsworth says the IMA model has shown there is excess fat in managed funds that can be returned to the investor.

High-net-worth investors

One IMA manager using the Financial Simplicity technology is Clime Asset Management. Clime managing director Roger Montgomery says wealthy people in Australia have been having their money managed in IMAs for years.

“They must know something to take advantage of them,” he says. “When clients can see IMAs they love them, they love the transparency, but in the adviser community there is still some inertia on the products.”

Montgomery says the unlisted trusts infrastructure still makes it easier for them to choose these types of products. Clime has a minimum investment of $50,000 in its IMAs, and has attracted $41 million in funds under administration. “We deal only in Australian equities, and our low minimum investment is achievable with inexpensive infrastructure,” he says.

“We outsourced to be competitive on cost, and we are achieving a great deal of scale.”

Another player at the lower end of the IMA retail market is Sealcorp. Thomas says his company calls IMAs separate managed accounts (SMA). “SMAs are where the investor holds the shares in an account, and the asset allocation is done by a broker,” he says. “The structure is similar to IMAs, and the fees that we charge make it a worthwhile opportunity to get involved in.”

Thomas says many IMA players have chosen to operate at the upper end of the market, but Sealcorp has set its minimum investment at $50,000, and has achieved $80 million in funds under administration.

One of the players at the top end of the market is Macquarie, which has a minimum investment of $500,000. “Our minimum is $500,000 for two reasons,” says Macquarie’s Embelton. “Liquidity makes it essential to buy lots of shares without diluting the market, and the investor is sophisticated and can access exclusive offerings.

“I think what I see is scale and liquidity of big shares, which leads to profit and a way of being cost effective.”

Adviser interest

Macquarie markets its IMAs through financial intermediaries, and most players are now predicting the market will grow more rapidly after a slow start. Holdsworth says he is seeing a lot more intent from advisers about using IMAs as a means of outsourced portfolio management. “Advisers are looking for listed equities for clients, and looking for solutions to achieve this,” he says.

“Recently in 2005 we have seen a substantial increase in levels of undertakings.”

Embelton says Macquarie has seen growth in its IMA business of up to two-thirds in the last nine months.

“Investors are recognising the benefits of IMAs,” he says. “If there is a typical client, it is someone who is incredibly busy working in a business, and they don’t have the time to think or read notices from brokers.”

Embelton says people who don’t have the knowledge on investing in direct shares are clients of IMAs.Super choice

Another opportunity for IMA providers is superannuation, particularly self-managed superannuation funds (SMSF).

“Where there is a trust and trustees who have to make investment decisions, they should also look at IMAs,” Embelton says. “As IMA managers we can handle these duties and make the investments.

“A lot of people are talking about IMAs in superannuation situations.

“With super choice people are going to look at their options, especially regarding SMSFs, as some are holding quite large balances.

“Some are well in excess of $1 million and will be looking for the structures the IMAs provide,” Embelton says.

Thomas agrees the arrival of super choice has created more opportunities for IMAs.

“Super choice will allow portability, and that will create opportunities in areas such as SMSFs,” he says. “So portability will lead to SMSFs, and that will create a new set of investors which will increase IMAs.”

Thomas says the demand for direct equities in SMSFs and the means to manage them will be a way of leading IMA growth. However, that demand for Australian equity IMAs may not happen until the market stalls and fund managers are seen to under-perform.

“There will only be a huge increase in IMAs if the market under-performs and the sentiment by investors is that they can do it better than the managers,” he says.