When implementing a managed account program, it’s critical that advisers and licensees develop and use the right resources to ensure the success of their new service, writes Toby Potter.

 

In deciding to implement a managed account program, advisers and licensees should not underestimate the resources that they need to have, in order to make a success of their new service.

In this article, I focus on the issues relating to implementing a managed account program on platforms. There are other models, such as individual client HINS or wholesale custody arrangements, but they raise the complexity further and are outside the scope of this article.

The nature and extent of resources required will depend on the type of program that advisers or licensees are planning to implement. The main choices that are likely to be considered are:

• Recommend a portfolio comprised of SMAs offered by the preferred platform;
• Licensee specific SMAs issued in conjunction with the platform;
• Become an MDA provider; or
• Act as a portfolio manager in partnership with an MDA provider.

Whichever of the choices are considered, resources are going to be required in several key areas:

• Management attention;
• Investment approach; and
• Compliance.

And in addition, depending on the platform capability, there may also be a requirement to take on some of the operations of the service.

Management attention

I’ve placed this first because before all else, the decisions that management make determine the structure of the program, and the decisions made early on will determine the characteristics and structure of the program. This will include decisions about:

• Investment approach;

• Target clients;
• Operating model and costs of the program;
• Pricing; and
• Partners or service providers.

A clear set of objectives for the managed account program and the metrics for success need to be determined before any other operational decisions can be made.

Of course, the consequence of this is that once these measures are agreed, they should be reported on and measured on a regular basis to determine whether the service is achieving the objectives which were set for it.

Investment approach

This is often thought of as the most significant area in which resources will need to be increased.

Apart from the first managed account type listed above – simply adding a number of the platform’s SMAs to the Approved Product List (APL) – the other three are going to require a significant focus on the investment area, as the licensee and its advisers move from a model portfolio – generally paper-based – to a process that takes responsibility for developing investment models through which actual client portfolios will be managed.

While this is sometimes viewed as simply ‘beefing up’ the investment committee, in reality it is a more significant task. Key questions here will be:

• Do we have the expertise to take responsibility for portfolio management within our current structure and resourcing?

• Do we have partners in research houses who we can rely on for portfolio construction?

• Who will be responsible for the daily monitoring of the portfolios and recommendation of any adjustment?

• What will be the costs of portfolio management and who will bear this?

• What continuity will there be between our current approach and the managed account portfolios?

These questions invite a full review of the investment process within the business. This will include:

• review of the documentation of the firm’s investment philosophy;

• development of the investment charter for the investment committee and determination of its membership;

• Specific allocation of key responsibilities for individual tasks – for example, asset allocation, manager selection and review, and security selection if this is undertaken in-house;

• Selection of partners to provide inputs, such as asset allocation, for each portfolio; and

• Documentation of policies, such as conflicts of interest and performance measurement methodology.

Clearly, the scope of these tasks will require significant input if they are to be properly carried out. The Responsible Entity (RE) of the platform’s SMA program, or an external MDA provider, is going to require that all these capabilities, and the resources to deliver them on an ongoing basis, are in place.  

Compliance

Finally, once the managed account program is in place, the resources in the licensee’s compliance team need to be reviewed to ensure that they, and the procedures they follow, are adequate to monitor the implementation of the service.

This is in two main areas:

1. Is there an independent process that confirms the portfolios are being managed in accordance with the SMA product disclosure statement of the MDA investment program?
2. Is the advice process consistent with the regulatory requirements?

Maintaining an independent process to confirm that the portfolios are compliant with their mandate is a responsibility that the SMA responsible entity, or MDA provider, is primarily responsible for. They are likely to insist that the portfolio manager has appropriate internal resources to carry this out.

In the case of advice, particularly for MDA services, the licensee will need to implement a specific process for checking that the correct document set has been provided to the client and that the annual review process is undertaken.

Summary

Unlike simply approving a new product on an APL, the decision to implement a managed account program where the licensee or adviser is involved in portfolio management, is going to require significant resourcing.

This may already exist in the firm, but will need checking against the requirements of the SMA responsible entity or MDA provider.

Toby Potter is Chair of IMAP.