Not all IMAs are created equal

Therecurrently exists a level of euphoria surrounding individually managed accounts (IMAs) in the Australian investment marketplace that is highly questionable.

Growth rates from Forrester Research have forecast that almost 15 per cent or US$2.6 trillion of all US retail investors’ funds under management will be held in five million IMAs by 2010.

Many are forecasting that Australian investors will move away from existing pre-packaged investment funds to the more flexible IMA option — in just the same ratios as the US.

IMAs have a range of advantages over traditional investment fund offerings by providing investors with distinct tax benefits. These tax benefits aren’t a component of traditional managed funds, as this type of investment vehicle is not driven to offer the same type of remuneration to investors.

These potential tax benefits do make the US-styled IMAs unique. Investors now own the underlying assets of an IMA. As a result, they can capitalise by ‘realising’ any gains or losses at period-end that are tax favourable, when viewed in the context of their entire wealth.

They also don’t bear the taxation burden of a capital gain created at some time prior to when they entered the fund, as is the case with existing managed funds. Individuals can also customise a portfolio by eliminating unethical holdings, or ensure that they are not overexposed to particular stocks that they already currently own via some other investment process, such as their superannuation account or their employer’s share/option plan.

From the fund manager perspective, an IMA program more closely resembles a traditional pooled fund, with the major difference being the legal owner of the underlying fund assets. They will offer portfolio styles, make stock selections and place bulked-up orders in much the same way for both investment vehicles, with the more detailed requirements of an IMA being fully automated.

An issue close to many Australian investors’ hearts right now is understanding the level of fees charged for the various investment vehicles and IMAs potentially provide a great improvement in relation to both fees and net returns.

With investors now heavily scrutinising current lower and even negative rates of investment return, this could be what it takes to make the masses vote with their feet to a new investment offering.

So today fund managers, brokers, advisers and platform providers are predicting great things from this new product offering — and crossing their fingers that they won’t lose clients.

A major defining component of the US-styled IMAs is in the use of automation technologies and tailored distribution programs. These technologies must be implemented prior to the launch of any glossy marketing campaign. This serves to eliminate any existing process inefficiencies and provides the distribution channel with streamlined business processes for the high volume of accounts it takes to produce cheaper fees. This helps to ensure that fees can be capped to rates such as 1.5 to two per cent, challenging the existing pooled fund rates.

Importantly, it also leaves advisers with more time to focus on providing greater value add to their clients and less time focusing on the administration matters. Increased portfolio monitoring and buy/sell actions are just one area where financial planners can ensure that their clients can gain the maximum taxation advantage.

Sounds easy to achieve. However, many Australian IMA providers are in fact not addressing these thorny issues of distribution and fees, and in reality, are just offering another version of a high-net-worth individual portfolio service.

However, the growth in the true IMA product is for a growing band of everyday households with greater money left to invest.

While there is plenty of room in our marketplace to cater for individuals with an increase in investable assets, there is little room for causing mass confusion in relation to the true definition of the IMA, which owes its origins to the massive US marketplace. An IMA is not a purpose-built and managed portfolio for a single individual or even a small group of individuals, and the two should not be confused.

With a tax driven investment vehicle such as an IMA, we have a June 30 cut off date for providing the promised benefits, including mass market type fees, customised and/or ethical investment choices, greater transparency and reporting improvements. Without some drastic progress in business efficiencies, there is no realistic way that IMAs in Australia can offer the same benefits as traditionally marketed funds — at a similar and sustainable (perhaps even reducing) cost.

Ian Mathieson is the managing director of DSTinternational.