One of the negative responses that the use of managed accounts elicits is that their adoption is simply a revenue grab by advice businesses.

I’ve heard this complaint about revenue from a variety of sources – regulators, researchers and fund managers, and even some planners themselves.

Since FoFA and the banning of commissions and product incentives, the advice industry has been forced into an existential examination of the services it delivers and the way it charges for those services. And this, despite the fact that for almost all advice clients, the cost of the service is clearly disclosed to them before commencement and then crystal clear every month in their cash account statements.

Assessing whether the value received is worth the cost, is something that clients can, and presumably do, undertake for themselves each time they look at their portfolio statement.

Implementing a managed accounts program is an opportunity for licensees to examine the structure of their business in a root to branch way. This includes:

• What do we believe about investments?
• What resources can we bring to bear on making investment decisions? And who makes those decisions?
• What value are we trying to provide directly or through management of the decision-making process?
• What is the role of advisers and how far is that from the role they currently fulfil?
• What type of managed account service best suits our business and our client base?
• What partners or service providers do we use currently, and can they continue to support our business?
• How do we manage the communication process surrounding the implementation of the managed account service, so that advisers and clients are as engaged as each feels necessary?
• How do we ensure that our best interest obligations to the client are actively met?

What I’ve seen occurring as a result, is a dramatic improvement in the professionalism of the delivery of advice and the management of the portfolios. This has had two countervailing economic consequences. Operating and administrative costs have fallen as a result of:

• More efficient portfolio implementation; and
• Use of lower cost investment alternatives – broader industry economic drivers are at play here.

Portfolio management costs have risen as a result of the greater level of commitment of resources to the business. In particular, the use of external specialists as portfolio managers, investment managers and independent members of the investment committee, have all added to a rise in the cost of service.

In addition, managed accounts, of course, have a legal structure of either being a registered managed investment scheme – as are most SMAs – or managed discretionary account. This brings with it compliance costs and the cost of assuming risk.  

As a result, the increased costs arising from greater investment in the portfolio management process and regulatory overheads have generally been passed on to clients. This has been offset by the reduction in the cost of administration and underlying investment products.

Overall, compared to adviser directed and implemented portfolios, although the standard of service and its robustness have risen substantially, there is generally no increase in cost to the client.

On the other hand, for advice businesses, because they are now being paid in an appropriate way for the services they are responsible for providing, the value of their business should rise, compared to the previous business models based on rebates and product payments.

All the best.

Toby Potter

Chair