Individually managed accounts - a solution for high-net-worth clients

Offering individually managed accounts to high-net-worth clients can be a scalable solution for financial advisers, writes Damian Graham.

For many advisers, high value clients can be a challenge to service. Along with high-balance portfolios, high-net-worth individuals and self-managed super fund (SMSF) clients need highly personalised and often complex strategies.

These clients often use a combination of direct shares and managed funds within their portfolio, creating an added layer of administration for your business. Demand for greater customisation and transparency of portfolio outcomes after the global financial crisis (GFC) has been driving many clients towards direct equities.

So in a new environment where advisers are facing regulatory change, the rising popularity of direct equity holdings and evolving fee models, how do you increase the scale of your business without needing to double your team or drop your service levels?

There is no doubt that managing share portfolios can be time-consuming, and implementation can be prone to human errors. In addition to this, advising clients on specific stock transactions can add risk to your business.

Consider the time and effort a single stock switch can require for one client. With numerous companies raising funds to shore up their balance sheets, the GFC exacerbated this issue.

Advisers have been inundated with corporate actions that could affect many of their clients, and which may require a Statement of Advice before transacting. This process can be hard to aggregate and control across multiple clients and, as a result, individual clients can receive different results from the same advice.

More broadly, delivering individually customised portfolio outcomes across a client base can result in disparate risk and return outcomes.

Monitoring the outcomes that reflect clients’ needs can be extremely time consuming and can reduce the scalability of any practice.

Importantly, it also raises the possibility that client portfolios may stray from their specific risk profile, creating a potentially negative client outcome – or, equally daunting, a compliance issue.

The scalable solution

While many understand the huge popularity of managed accounts overseas, some have questioned their relevance to the Australian market.

However, now is a time when managed accounts can demonstrate, more than ever, their true value on Australian shores.

In fact, within the current environment, managed accounts could be one of the simplest ways to get scale in that part of a business.

Outsourcing professional investment management, stock selection and implementation, risk and tax management to a managed account provider can save time and reduce compliance risk.

This leaves more time to focus on client service and relationship building, which in the post-GFC landscape has become more crucial than ever before.

Due to this trend, we are seeing first hand that dealer groups and planning firms are making moves to add managed account offerings to their Approved Product Lists.

However, there remains an important difference between the managed account vehicle that has historically been focused upon by advisers, the separately managed account (SMA), and its more customised cousin, the individually managed account (IMA), which many may not be aware of.

IMAs offer an additional level of customisation. And what does that mean? Importantly, it means more sophisticated tax management.

I firmly believe that it is only when the portfolio management activity is tailored to a client’s specific taxation scenario that the optimal outcome can be generated.

In short, if your managed account provider does not offer tax-efficient portfolio management in a scalable fashion, then you may not be getting the best outcome.

For clients …

Due to the ability for portfolio outcomes to be tailored to an investor’s specific needs, existing share portfolios and managed funds can be transitioned into an IMA.

This is a great place to start. It not only limits transition costs, but also ensures ethical preferences or security specific issues are catered for. If a client does not want to invest in the gaming industry, they do not have to.

IMAs can help investors with large undiversified share holdings move to a more balanced position. Not only that, but they can do it in a tax-efficient manner to legally maximise after-tax returns.

Company executives with large employee share plans, or those that have inherited shares and find it difficult to make objective investment decisions, may prefer to avoid the hassle or emotional involvement of making individual stock decisions for their portfolio.

Clients requiring structure and active risk management, such as those using SMSFs, can benefit from the discretionary structure of an IMA.

On the flip side, clients who seek ongoing liquidity may find an IMA has the flexibility to handle their needs, since stocks can be bought or sold whenever the market is open.

IMAs have the potential to offer clients an optimal tax solution for managing their investment portfolios.

As opposed to unitised portfolios or even tax-efficient SMAs, IMA clients can benefit from a portfolio management process that may maximise after-tax returns.

IMAs offer direct ownership of the underlying stocks in a portfolio, giving the client access to franking credits while not inheriting capital gains tax liabilities that can accrue in a unit trust.

Any capital gains liabilities will arise only when the stock is sold on behalf of the client.

Again, the GFC has exacerbated this issue.

Some clients in managed funds experienced not only the declining value of their portfolios, but also faced a tax bill as portfolio managers were forced to sell holdings in order to fund redemptions.

… and for finanical advisers

Within the current environment, advisers are telling us that they are looking for four primary solutions: risk management, productivity without adding more resources, greater efficiency and ways to assist their business transition smoothly to a new fee model.

Offering an IMA can result in a significant uplift in productivity. This is basically because the portfolio managers become an extension of your team.

Clients and advisers control the strategic direction of the portfolio, while a managed account provider handles security selection.

Outsourcing investment management can also help to reduce risk, which is becoming more and more relevant as dealer groups revamp their business models under a changing legislative environment.

So for advisers looking to increase the scale of their business, without adding extra headcount or dropping service levels, it might be time to see what a managed account can do.

Managed accounts, like any solution, must be flexible enough to meet your requirements while offering true customisation and tax management for your clients.

It is only by getting the right offering for your business that you will overcome the challenge of personalisation with scale.

Damian Graham is head of Macquarie Customised Portfolio Management.