IMAs still searching for the bullseye

Individually managed accounts (IMAs) were destined to be the next big thing in financial services three years ago.

Today, the picture is very different. IMAs have become a specialist option for the better-off client.

Only Asgard has made any serious headway in bringing them to a wider audience and with its Separately Managed Accounts (SMAs), the company has picked up about $1 billion of funds under management.

The Asgard entry level for its SMAs is $50,000, which is considerably lower than its few competitors.

So why has the sector not lived up to all its expectations?

Perhaps we should look back at what was being said three years ago. The predictions were that IMAs were going to replace fund managers as more clients took physical control of their equity portfolios.

An IMA enables a client to select a range of stocks — in Australia this usually means local shares — that are recommended by the account provider. The client will then hold these stocks in their own name rather than the fund manager’s.

The argument was that the client would get the tax benefits from owning the shares direct. Additionally, they had more control over the investment.

HSBC head of distribution Michael Lovett admits the concept didn’t turn into a reality.

“At this stage, there is no real market in Australia for IMAs,” he says.

“There are quasi-models that are available through brokers, but that is a quite small market.”

HSBC offers IMAs through its private clients division and has about $250 million of funds under management.

The funds are in either Australian equities IMAs or balanced portfolio IMAs.

“IMAs are very much at the high-net-worth end of the client base,” Lovett says.

There are varying opinions about why IMAs have failed to so far capture the wider imagination.

Portfolio Direct Services executive director Paul Bray, a major proponent of IMAs, puts the blame squarely on the major funds management groups.

“The only reason why IMAs have not taken off is that the large fund managers control distribution,” he says.

“IMAs have tended to be a cottage industry to date and the technology has only allowed clients to go online in recent months.”

Brady says the slow progress in systems development at the major platforms to handle IMAs has been another reason for the slow uptake.

“Most platforms, which are controlled by the large managed funds, haven’t had the technology to cater for stocks,” he says.

“They don’t manage stocks, they just report on them.”

But some platform providers, such as Aviva, the owners of the Navigator master trust, which does not offer IMAs, disagree.

Aviva group director of products strategy Rob Donaghy believes other factors, such as the rise of boutique fund managers, has hampered IMAs.

“People are happy to use boutique fund managers for their different investment strategies, but they still want to use their managed funds,” Donaghy says.

“I think they provide a distinctive way of growing money rather than the client buying direct shares.”

Donaghy says most investors go to a financial planner to look after the complexities of investing and that is why advisers like to select managed funds where the fund manager will handle areas such as taxation.

“We do not control the investor’s choices,” he says.

“There are a lot of options in Australian fund managers, but we believe it is the adviser that helps make the decisions, not us.”

The arrival of online share brokers, such as Commsec, has also taken away some of the attraction of IMAs, Donaghy says.

Whatever the factors hindering growth to date, fans like Brady are remaining optimistic about the sector.

He expects Portfolio Direct Services IMA funds under management to grow from $130 million to $300 million in the next 12 months.

However, this is dependent on distribution of IMAs through advisers becoming better.

Brady says when IMAs take off, the large players in financial services will want the portfolio management services from the specialist players to enable them to offer the service.

“In the future, people will want the template rather than the managed fund, which is now just a commodity,” he says.

“So we will see the boutiques do it first and then the bigger managers will take it up, and finally the banks will become involved.”

Asgard is also backing the sector. Brad Scally, product manager of Asgard’s parent, Sealcorp, believes the prospect of direct share ownership will continue to appeal to investors.

“We are offering a product with a completely managed share portfolio that taps into the skills of professional share managers with the benefits of direct share ownership,” he says.

The Asgard SMAs are centered on 13 portfolios that cover a variety of investment styles, including value, growth, neutral and growth at a reasonable price (GARP).

The managers vary from household names, such as Citigroup, AMP and Perennial to boutique managers such as JM Asset Management and Investors Mutual.

Most are dealing in Australian equities, although Schroders deals with hybrid securities and Goldman Sachs JBWere deals with listed Australian property trusts.

“They are a portfolio of structured investments,” Scally says.

“But each investor has a beneficial interest in the shares.”

The Asgard SMA has been sold through financial planners and their advice role is factored into the decision-making process.

Scally says many of the portfolios are returning double-digit returns, which is helping people warm to the concept.

“People have been comparing the performance of SMAs to managed investments and have seen the good returns,” he says.

“The good returns also mean Asgard is committed to SMAs as an alternative product offering.”

Scally says offering 13 portfolios in the SMA product gives financial planners something to talk about with the clients.

“Because we are offering a broad portfolio, it enables the planner to offer the client something different,” he says.

“They will probably still have clients in managed funds, but the SMA also offers diversity and something for a client who wants some control.”

Scally says the SMA also enables the client to manage their tax outcomes as items like capital gains from share sales are controlled by the client.

Should advisers be concerned about clients taking control of their portfolios?

Scally thinks not, as the relationship between the client and the adviser should not be affected.

The adviser will still be advising the client on the portfolio choice.

Another argument against SMAs has been the subject of fees. The investor pays the manager an ongoing fee rather than a one-off trade with an online broker.

Scally says the fees for SMAs have been competitively priced, with trades as low as 30 basis points.

Asgard SMAs charge an administration fee of 0.97 per cent for the first $250,000 in the account, falling to 0.46 per cent for balances over $1 million.

There is also an investment management fee depending on which manager is selected and an upfront fee, which can be up to 5.12 per cent, which is negotiable with the adviser.

Despite the scepticism of groups like Aviva, Scally expects many other platform operators will now start looking at launching SMAs.

“There is a lot of interest stoking up from clients and the industry,” he says.

“Now SMAs have credibility and a number of managers becoming involved in the sector will grow, but it will still be small initially.”

HSBC’s Lovett agrees. He says HSBC will consider expanding its IMA offerings.

“With an IMA, the client owns the shares, so high-net-worth individuals are more interested in having a say in what they invest in,” Lovett says.

“Also, IMAs tend to be more absolute return-focused, which fits with our private client looking for positive returns.”

Lovett says if the company launches IMAs on a wider basis, it would be targeting self-managed superannuation funds, but he emphasises that HSBC has to look at the merits of such a business before making a decision on going ahead.

He says the IMA market in the US has been growing at 24 per cent a year, but believes Australia will not achieve anything like that sort of growth.

“We believe IMAs in Australia will grow at about 15 per cent a year, but I have to be honest and say that has not been backed up with any serious research,” he says.