Toby Potter and Angela Ashton explain the four elements that make up a managed account and the importance of understanding how each element interlocks with the others.
There are four elements of a managed account program that every adviser or licensee that is thinking about implementing a program needs to consider:
- Legal Structure
- Investment process
- Technology and Operations
- Advice process
Put together, these four elements determine the type of managed account that will be offered and how it’s going to fit with the advice service offer.
The ‘program sponsor’ needs to think about each area carefully. While the term ‘program sponsor’ has no legal basis, it’s a useful concept if you take it to mean the organisation which, while not necessarily undertaking all the functions to deliver the managed account program, is primarily responsible for: determining its characteristics; which other organisations are involved; and how it is presented to the retail client.
Generally, the program sponsor will be the advice business that has the retail client relationships.
Before choosing a managed account for your practice, it’s best first to answer a couple of questions. These include:
- What advice and portfolio management service do you currently offer?
- What do you want the new service to look like?
- What are the current resources you currently have available, either internally or externally?
- What level of operational and financial risk are you prepared to assume?
- What revenue do you need to achieve to make the service viable and sustainable?
These questions will determine the approach you need to take in determining the optimal approach in designing the managed account service. Making it more complex is that considerations in one area – for example, legal structure – will be affected by your options in other areas, such as technology. Set out below are the key issues which you will need to consider in each of the four elements of a managed account program and we end this article with a couple of examples of how the business model determines quite different approaches to adopting a managed account program.
- Legal Structure
The two principal options that a licensee can choose are Separately Managed Accounts (SMAs) or Managed Discretionary Accounts (MDAs), and within each are a number of choices.
SMA
A platform-only choice where the managed account is effectively a managed investment scheme with a PDS and responsible entity. Product choices are generally a menu of third party managers, dealer managed portfolios and in some cases, third party responsible entities. These can be offered under personal or general advice.
MDA
MDA services have an MDA provider (rather than a responsible entity), a client agreement, FSG, and an investment program that accompanies the SOA.
Part of the motivation for adopting one or another of the available legal structures will be the branding and pricing strategies that the sponsor decides to implement. This may be because it wants:
- to take a margin for its investment management;
- reflect its operational structure; or
- ensure the program is branded consistently with the presentation of other services, such as investment management or its corporate brands.
- Investment choice
Just like advice provided outside the managed accounts world, advice businesses have many choices in the depth and style of investment approach they adopt. These include:
- Relying on external research on SMA managers and providing advisers with an APL from which they select for each client;
- In-house investment committee to provide asset allocation and manager selection;
- In-house security selection; and
- Delegation of responsibility for investment selection to advisers.
Choosing amongst these options will depend on the current business model and the aspirations for development. In turn, this is influenced by your investment philosophy and choice of investment vehicles: managed funds vs ETFs or direct security holdings, active vs passive or enhanced index, Strategic Asset Allocation vs Dynamic Asset Allocation.
If you are involved in the portfolio management of the managed accounts your advisers recommend – whether as dealer SMAs or in an MDA program – it is likely that you will need to significantly increase the resourcing of your investment team and investment committee. External, independent participants, such as researchers and investment committee members with specific expertise, are likely to be necessary.
- Technology and operations
The default technology and operations model for most advice firms has been to outsource these functions to one or several platforms, and choose a planning and reporting software provider.
Platforms increasingly offer portfolio management capabilities, which allow advisers, licensees or SMA/MDA providers, to execute portfolio trades and make corporate action decisions. This ensures integration of portfolio management and asset holding and reporting.
However, many external software providers are now starting to offer software capability, which allows portfolio management outside the constraints of platform administration.
Allied with decisions about technology are decisions about custody or asset holding. Holder identification number (HIN) sponsored ASX holdings are the most obvious example of a widely used structure as an alternative to platforms.
This may mean that the generation and execution of trades and administration is retained in the advice business, which raises both the complexity and operational risk in the business.
- Advice
Implementing a managed account program frequently means a change in the way in which advice is delivered and a change in the relative roles of the adviser, their support staff and the central functions of the licensee.
When a practice decides to adopt a managed account program, the role of the adviser changes but becomes no less significant than when the adviser was making the investment recommendations.
Firstly, in explaining to clients how the service will operate and how each client will benefit, is central to the success of the program. Then, ensuring that the client’s goals and constraints, such as investments to retain or exclude, can be accommodated by the managed account program, which is an essential part of the managed account service.
Although one of the benefits cited for managed accounts is adviser practice efficiency, the primary change to the advice process is generally to move the individual account investment selection process away from the individual adviser and into the central investment team.
As long as the technology chosen has the capacity to support individual preferences or constraints, such as exclusions – which is the responsibility of the adviser to identify and address – and the investment choices offered enable the client’s goals to be achieved, then the basic portfolio decisions of what to buy or sell and when to achieve those goals, can be delegated to an investment team.
Combining the four elements
The choices in each area are interlocking. Or viewed another way, the business model in which each advice firm has developed, means that a relatively unique but complimentary set of decisions need to be made to ensure the program is successful.
In Table 1, there are a number of advice business models and the choices which the program sponsor might make as a consequence. These examples are only representative of some of the ways in which appropriate choices can be made in each area to develop a coherent service offer. There are, of course, many other combinations which would be appropriate for other organisations.
Toby Potter is Chair of the Institute of Managed Account Professionals (IMAP) and Angela Ashton is a Director at Evergreen Consulting.
* This article was originally published in FS Managed Accounts 2017.