By Toby Potter - IMAP Chair
There’s a lot of change going on in advice. Much of it driven by regulation but the deeper impacts are due to structural change impacting many other sectors of financial services.
Managed accounts are an important growing part of the advice profession and IMAP’s survey of the managed account market shows a total FUM as at 30 June 2021 of $111bn, exceeding $100bn for the first time
Managed Accounts are delivered through two main structures –SMAs, essentially a single platform managed investment scheme, and Managed Discretionary Accounts, an agreement based service. The former is generally a product based approach to the delivery of advice, the latter a service based approach.
Either type of managed account is created by or on behalf of the advice profession – a way of delivering more or less customised portfolios in an efficient way, how customised is a function of the technology in use and the client circumstances.
IMAP has been collecting data on managed accounts of all types since 2017 and at $111bn they are almost exactly the same size as the ETF market. This CAGR of 21% over the past 3 years, if maintained, will see managed accounts exceed $200bn in 2024. Simple trend extrapolation is often a trap, but in an advised market that comfortably exceeds $1tn in assets this seems credible.
We identify seven factors as driving this growth:
FUM that currently sits in SMAs would be very highly weighted to portfolios managed by advice firms as they have been looking for better investment solutions for their clients and business efficiencies. We expect this trend to continue, especially as regulatory changes like DDO provide challenges for D2C distribution of managed investments.
Regulation, higher educational standards, the generational change of traditional advisers replacedreplaced by younger, better educated women and men, many more independent investment consultants; all these have led to the professionalisation of advice and portfolios built to meet client objectives with a higher probability of success.
A direct consequence of this is advice firms adding resources to manage or “commission” portfolios delivered through managed accounts which reflect their particular approach to investment markets. The investment consultants and research houses have been happy to meet this need and have brought far more rigour to the creation and management of portfolios than the old APL based approach. This has allowed advisers to focus on the particular areas of expertise where they can personally add value for clients.
Fixed interest ETF usages continues to grow quickly and now accounts for approximately 20% of all Praemium ETF FUM, with advisers and model managers now accessing granular ideas across duration or credit quality
2. Wider Investment Choice
One of the key features of the investment landscape has been the expansion of investment options such as retail access to international shares, alternative funds or ETFs and other ETPs on the ASX.
The growth in the number and value of ETFs/ETPs, with the transactional advantages, transparency, superior reporting and often lower cost these products are able to offer compared to unlisted managed funds has seen them rapidly adopted into managed accounts.
IMAP estimates that managed accounts constitute 14% of FUM invested in ETFs in June 2021
As in so many other areas, technology has transformed the capability of providers to easily create highly customised services. The platforms have been in a technology race to enable licensee based portfolio management and lower cost technology is enabling the management of directly held assets in a way which simply wasn’t contemplated previously. Apart from the portfolio management capabilities, we’re seeing offshore listed assets directly held by retail clients and traded economically.
As an example of the impact of technology, Nucleus Wealth, the 2021 IMAP Innovation Award winner, offer highly nuanced individualisation of ESG preferences through managed accounts in a way not available in pooled vehicles.
Cloud based services and blockchain will only accelerate this drive.
Traditional advice through SoAs / RoAs is a cottage industry, inadequately systematised, delivered on a one by one basis to clients. It’s a recipe for compliance nightmares and breaches. The recent Westpac advice business corporate action remediation is costing around $100m and grew out of apparently mishandling less than 1 corporate action on average per client per year for 14 years.
Managed accounts enable a licensee to introduce a systematic approach to the management of portfolios, and ensure the clear allocation of responsibilities between advisers, platforms, REs / MDA Providers and portfolio managers.
Best interest obligations are a frequently discussed topic in regard to managed accounts. Does “best interest” have to mean cheaper? Actually, the correct question is “When is a process that is more structured than traditional advice, has clear objectives, is systematically managed, is more equitable, reduces implementation leakage and enables better reporting not in a client’s best interest?” This message is starting to become apparent to clearer thinking advice firms.
5. Competitive Pressure
Platforms, investment managers, research houses, advice licensees have all felt the pressure in the past few years from their respective client bases to create and support managed account offerings. It’s a dynamic market at work and the pressure to innovate isn’t likely to let up in the near future.
It’s part of a virtuous circle of innovation where demand calls forth supply and supply creates demand.
We’ve been focused on bringing our institutional risk management expertise and capability into these retail portfolios. The portfolios are invested into ETFs to keep costs down and balance an increased allocation to growth assets with a systematic risk management strategy.
6. “Retailisation” of Institutional Capability
Driven by the other factors we’ve set out above, the lines are blurring between retail, wholesale andinstitutional clients and capabilities. Examples include;
- A managed account presents the chance for a portfolio manager to offer investment managers mandates of 10’s or even 100’s of millions of dollars,
- Use of assets listed on offshore exchanges and pooled structures such as UCITS in retail portfolios,
- Milliman, a global consultancy and winner of the 2020 IMAP Innovation Award offers a built-in dynamic risk management strategy, designed specifically to manage sequencing risk for retail clients
- Valor, a finalist in the 2021 IMAP Innovation Awards, manages currency hedging for individual retail clients,
- Institutional asset consultants such as JANA are also very active in managed accounts.
Capabilities which previously were available only to institutional investors or though pooled vehicles such as unit trusts are now increasingly deployed for individual accounts
7. Price Compression
All of these factors are leading to lower costs for retail clients. Advice licensees see a value add for their clients in their ability to use lower cost investment options such as ETFs and direct holdings and in putting pressure on the costs of other participants in the value chain through rebates and specific unit classes.
The price pressures on platforms have occurred for broader reasons, but managed accounts have contributed. As advisers feel their own margins to be under pressure, expect this focus on driving down costs to continue.
And as the costs associated with managed accounts fall relative to the far more expensive service delivery of individual advice through RoAs, expect this economic reality to compound the attractiveness of managed accounts for both advisers and clients.
The factors we have listed above aren’t temporary and are likely to intensify.
Our prediction of a $200bn market before 2025 doesn’t seem far fetched.
Toby Potter is Chair of IMAP (Institute of Managed Account Professionals) and a Director of Philo Capital Advisers, an MDA Provider.
Victor Huang is Principal and Head of Trading, APAC for Milliman based in Sydney
Damian Cilmi is Head of Investment Managers & Governance at Praemium
Mat Walker is Chief Commercial Officer for Praemium
This article was first published on 14 Septe 2021 by Graham Hand Editor of Firstlinks Weekend