For many years, managed accounts have been tipped as the next big thing. Benjamin Levy asks, have they finally arrived?
Another key component of direct investing are managed accounts, which like direct shares, are also predicted to grow in popularity as the Future of Financial Advice (FOFA) reforms are introduced. The high touch, investment management approach of managed accounts, such as MDAs (Managed Discretionary Accounts) or SMAs (Separately Managed Accounts), fit naturally inside the parallel high-contact approach of opt-in provisions and a statutory best interest duty.
But despite promising so much for so long, to date, managed accounts have fallen short of industry expectations of client take-up. So is the sun setting on the managed accounts sector? Far from it, if you talk to the Institute of Managed Account Providers (IMAP) chairman Toby Potter, who enthusiastically speaks of the explosive growth in the managed accounts industry over the last few years.
"We're starting to see both the [Managed Discretionary Account] version and the SMA version get increased traction," Potter said.
Research by Investment Trends late last year found that advisers are placing more clients into direct shares, with the researcher expecting the trend to increase.
New client investment in direct shares is predicted to rise to 26 per cent in 2013, a jump of more than 10 per cent from two years ago, according to Investment Trends. As advice on direct share investments increases, the need for structures like Separately Managed Accounts to avoid compliance risk and stock monitoring will also increase, said Blackrock's co-head of customised portfolio service, James Langlands.
Managed Discretionary Accounts in particular, with their high touch, high investment management approach, are a natural fit with the high touch world called for by the impending FOFA legislation, such as opt-in and statutory best interest declarations.
"FOFA is forcing dealer groups and advisers to think hard about their remuneration and commercial models for their business, and an investment management approach which is represented by an MDA fits well in that high touch investment management framework," Potter said.
Dealer groups with a large, low touch, limited contact client base don't fit well in the world of managed accounts, he added.
But dealer groups need to be certain about what their clients' needs are and what each investment management framework is built to do before they jump on the managed accounts bandwagon.
Advisers who are looking to provide a solution for their clients' whole portfolio approach should implement an MDA model of managed accounts, Potter advised.
But the Australian Securities and Investments Commission (ASIC) has made it difficult to receive MDA authorisation, a factor which dealer groups need to take into consideration when investigating the framework.
"The responsibility to manage a client's portfolio with discretion is not something you want to take lightly, and so ASIC's requirements before it issues MDAs are rigorous and particularly centred around experience," Potter said.
If a dealer group is looking for a solution for direct equities only, then they should be considering an SMA version of a managed account, which also have inherent tax and operating advantages.
However, Potter warned that any tax benefits you can get from an SMA are most applicable when the SMA is used for Australian equities.
According to Potter, when it comes to building a managed accounts program, a dealer group needs to factor in three major components:
- A legal structure,
- Portfolio management tools, and
- An administration capability.
The legal structure can be covered by a client-adviser contract or Product Disclosure Statement, giving the adviser the power to make and implement decisions on behalf of the client.
Portfolio management tools will enable the adviser to see what the portfolio should look like. And the third part of a managed accounts program is the administration capability. That administration capability can be provided by specialist administrators like OneVue, but increasingly, administration is being conducted through conventional platforms.
Finally, Potter said that planners need to be aware that creating a managed accounts program from scratch, including the appropriate authorisations, could take up to six months.
Source: Financial Planning, Aug 2011