The adoption of managed accounts over the past three or four years – there is now approximately $60 billion invested in various forms of SMA and MDA – has been driven by a number of separate factors. These are:
- An attempt to achieve greater practice efficiency among advisers;
- A desire by advisers to deliver better, more precise client outcomes;
- Technology developments that have enabled the systematic, model-based management of many portfolios; and
- A strategic trend for advice businesses to move towards wealth management. This has meant different pricing models.
If the last of these clashes with regulatory change, will the other three drivers be derailed?
All forms of managed accounts are subject to the existing FOFA regulations relating to conflicted remuneration, just like any other financial product. Indeed, SMAs are generally registered managed investment schemes and are subject to identical restrictions to those which apply to unit trusts.
However, it’s worth considering how a tighter regulatory regime might impact the key drivers that I have set out above as central to the growth in managed accounts.
Whether an AFSL obtains revenue from their managed account service or not, the efficiency gains from managed accounts are substantial. Advisers will continue to seek improvement in their office efficiency.
Better client outcomes
By adopting a managed account structure, particularly multi-asset class models, advisers recognise that client outcomes will be improved in several ways:
- Efficient implementation of tactical changes;
- Client portfolios receiving continuous review, rather than annual ad hoc review. This makes the advice fee easier to validate;
- Use of listed investments that was previously seen as impractical by many advisers. Generally this has meant a lower cost of investment;
- Establishment of central investment teams, with an increase in the level of experience and skill applied to portfolios; and
- Other cost reductions, particularly in fund manager’s MERs and often platform costs. The benefit of this flows directly to the client.
Taken in aggregate, these factors lead to better client portfolio outcomes. None of these issues are likely to be reduced in their impact by regulatory change.
One of the impediments to the adoption of managed accounts was the inability to implement them on major platforms. Every one of the large platforms is now well advanced in implementing this capability. Again, no likely regulatory change will cause these developments to be withdrawn.
Charging for portfolio management services
The development of more rigorous portfolio management capability often involves external consultants or directly contracted investment managers, and comes at a cost. Advice groups either absorb this cost or levy a portfolio management fee on clients to cover it.
For the groups who absorb it as a cost of achieving the benefits outlined above, any regulation change will likely be a matter of indifference. For groups that recover these costs, there are well established client consent processes they can apply.
So, without wishing to seem like a Pollyanna, we don’t think there will be a material negative impact on the trend to migrate significant existing advised assets into managed account structures.