Managed accounts record strong growth

For the six months to 30 June 2019, funds under management (FUM) in managed accounts grew by 14.9 per cent or $9.26 billion, to stand at $71.38 billion. For the same six month period, ned fund inflows doubled on the previous six month period to $4.43 billion, or a 7 per cent increase on total FUM.

Commenting on the findings from the bi-annual Managed Accounts FUM Census, IMAP Chair Toby Potter said the FUM Census results suggest that investors are working closely with, and have confidence in, their financial advisers, “evidenced by the steady inflows of new funds into managed account arrangements”.

According to Milliman Head of Capital Markets – Australia, Victor Huang, the improvement in investment markets for the first half of 2019 saw the value of the ASX/S&P 200 Accumulation Index increase by 19.73 per cent over the six month period, compared with a -6.83 per cent decrease in the six months prior.

Potter said although the MDA category remains the largest managed account category, platform-based SMAs are growing at a faster rate and closing in on the MDA total.

The Managed Account FUM Census is a bi-annual study of the FUM invested through the main forms of managed accounts, including SMA, MDA and IDPS-like services. The survey is conducted by IMAP in conjunction with global actuarial firm, Milliman. Forty-three companies participated in the latest Managed Accounts FUM Census.

“This census provides a good, representative picture of the managed accounts market,” Potter said. “Participants include the major platforms, banks and MDA providers, as well as individual licensees who largely operate their service internally.” 

Managed Account FUM – 30 June 2019

Source: IMAP/Milliman Managed Accounts FUM Census - 30 June 2019.

Planners outsource investment selection

Financial planners are increasingly bearish in their outlook for the domestic stock market, with planners expecting local shares to deliver capital gains of just 1.4 per cent over the next 12 months, down significantly from 4.6 per cent in 2018. 

This was one of the key findings from the Investment Trends 2019 Adviser Product and Marketing Needs Report, which was finalised in July 2019.

“Uncertain macro conditions at home and abroad have dented planners’ confidence in delivering the appropriate level of risk-adjusted investment returns for their clients,” said Investment Trends analyst, Viola Wang. “Geopolitical risk and share market volatility are growing concerns among planners, with many also keeping an eye on global debt levels and the Australian economy.”

Wang said there was a noticeable trend among planners to move from being investment pickers to asset allocators, particularly post-Royal Commission. 

“Once asset allocation is determined, close to half of planners now say they are no longer involved in picking the individual investments,” Wang said.

The proportion of planners directly involved in selecting investments for their client portfolios fell from 56 per cent to 53 per cent in the last 12 months, with a growing proportion utilising model portfolios, managed accounts and multi-manager funds.  

“More planners are choosing to outsource investment selection to focus their time and effort in areas they believe they can deliver more value to clients. Our research shows outsourcers perform better in key business metrics compared to those who do not – they typically have significantly larger client books and advise on higher levels of new client inflows,” said Wang. 

Passive investing

At 65 per cent, diversification continues to be the top priority for planners when selecting investments for their clients, but lower cost products is now the second most-cited priority (42 per cent, up from 39 per cent), alongside capital preservation at 42 per cent (down from 54 per cent).

“Planners’ appetite for low cost diversified portfolios is also reflected in their growing preference for passive investing,” said Wang. 

When asked what proportion of total client investments they would prefer to allocate to passive investments over actively managed investments, the average planner now prefers to allocate 33 per cent of client portfolios into index tracking investments, up significantly from 19 per cent in 2018. 

“Against this backdrop, Vanguard has further extended its lead as the most widely used fund manager among planners (62 per cent use it for new business, up from 55 per cent in 2018), followed by Magellan (54 per cent) and Platinum (44 per cent). Fidelity (36 per cent) and PIMCO (36 per cent) have both made significant gains in the last 12 months to round out the top five,” said Wang.

Greater transparency

The report also revealed that planners would be re-evaluating their product set post-Royal Commission, with a growing number saying they will use more transparent investment products, while relying more on investment product providers for their information and education needs. 

“Already, planners are interacting with investment product providers through a wider range of channels than in 2018, with conference and webinar attendance growing rapidly,” said Wang. 

“Faced with low yields and increasingly uncertain market conditions, financial planners will be relying on fund managers more than ever for insights and products that are appropriate for the current market environment.” 

The Investment Trends 2019 Adviser Product and Marketing Needs Report is an in-depth study of key asset allocation trends among Australia’s financial planners, as well as their views of fund managers and various investment products. The 12th annual edition of the report is based on a survey of 815 financial planners concluded in July 2019.

IMAP highlights risks of FASEA Standard 3

The IMAP Regulatory Group has written to FASEA in relations to its Code of Ethics and its poorly worded Standard 3, which affects advisers, including but not limited to their use of managed accounts. Following is the standard quoted in full:

“You must not advise, refer or act in any other manner where you have a conflict of interest or duty.”

The Code of Ethics has the force of law and comes into effect on 1 January 2020. It applies to advisers personally and not to licensees or dealer groups. On the face of it, it tilts the playing field enormously in favour of advisers affiliated with institutions and against those where the adviser is a principal of the business or self-licensed.

The explanatory notes say that recommending in-house product is okay if the adviser doesn’t directly benefit. However, it doesn’t address the situation where the adviser is a shareholder in the licence and the business benefits as a result of the product or service recommended. The benefit need not be financial.

Read literally, the Code also bans an adviser recommending that a client receive ongoing advice, since the adviser will presumably benefit from remuneration received for providing advice.  

IMAP’s discussions with FASEA has suggested that further explanatory notes will be forthcoming and may address managed accounts in particular. However, explanatory notes may not be of any assistance to the Code Monitoring bodies in the face of black letter law.

The full version of IMAP’s letter to FASEA CEO, Stephen Glenfield, which outlines IMAP’s concerns in relation to FASEA Standard 3, can be accessed at imap.asn.au