Three years ago, we set ourselves a challenge – to create a dynamic, flexible and efficient managed account platform that advisers could tailor to really suit their needs and the needs of their clients. We set out to create a real game changer; a solution that would make a tangible difference to the advice industry and businesses right from the onset.  

It was an exciting, and sometimes exhausting, time for our dedicated team of investment and technology experts, who invested thousands of hours over a 12 month period into developing our managed account (MA) offering – shaping and reshaping, tuning and fine-tuning, until finally, about two and a half years ago, we were ready for launch.

A genuine surprise

It therefore came as a genuine surprise to us that we faced challenges right from the start. We faced these challenges because, as it happened, our initial thinking around how the advice community would use our product was completely incorrect.

We thought advisers and advice groups would use our managed account in one of two ways.

Firstly, to solve asset class problems or to supplement a portfolio and gain direct exposure to a specific asset class. This scenario could see an adviser pulling out of an Australian managed fund and buying into an Australian managed account model to access the underlying assets that made up that model. Off the back of that, we also expected most advisers to use managed accounts to better manage direct equity portfolios.

The second way we expected advice groups to use our managed account offer was as an investment solution for clients, as managed accounts have often been touted as an investment solution that provides greater transparency and tax effectiveness than other solutions.

Well, we were wrong on both counts.

Most advisers began by using our managed accounts as whole of business solutions and they continue to use them this way. So, rather than just employing them to solve an asset class problem, they are using them to manage portfolios of diversified assets.

Approximately 75 per cent of the assets sitting within our managed account product are managed funds.

This experience naturally informed the evolution of our managed account offer. For example, the use of managed funds meant we needed to enhance our algorithms to handle non-liquid assets.

It also meant catering to numerous advice business models and developing ways to facilitate different asset types within managed accounts, such as fixed interest, which have different trading requirements.

Today, we are seeing the early adopters, or the advisers who have been researching, looking and now using managed accounts for 12-18 months, very comfortable with the managed account structure. They are comfortable positioning it with their clients and very comfortable about the benefits it has for their back-office.

Findings from research published in the recent netwealth AdviceTech Report indicated that 57 per cent of advisers plan to adopt a managed account solution by 2019, with 35 per cent of advisers already using them today.

Popularity

So, why are managed accounts becoming so popular?

We think the growth in managed accounts has been driven by several factors all coming together at the same time to create a perfect storm.

The first factor, albeit seven years ago now, was the Global Financial Crisis (GFC). The GFC exposed poor portfolio management. Clients had serious losses and advisers couldn’t quickly react to market conditions, so they began looking for more efficient ways to manage their portfolios.

The second factor was that advisers began to recognise that their value proposition was strategy and client engagement, not the delivery of investment.

The third factor was the Future of Financial Advice (FoFA) reforms. FoFA meant advisers had no choice but to become more efficient and to literally look at every part of their business, decide where they added value and where they could offer the greatest benefit to clients.

The fourth factor was technology and how technology has changed consumer expectations. Consumers demand absolute transparency and increasing access, and technology has enabled both these things.

Further, over the past three years, technology has made managed accounts accessible as an investment option within most platforms for the very first time. Before that, they were stand-alone niche offerings capable of solving small problems that weren’t easily consolidated with broader portfolio assets. So, technology has made managed accounts far more accessible to a much bigger market.

The future: managed accounts 3.0

Which brings us neatly to the big picture question, which is: What does the wealth industry want from managed accounts in the future? Or, where to from here?

We believe the answer is: greater sophistication and greater customisation.

This next stage of the managed account evolution is about being able to build out a full, sophisticated, customised offering, as not every managed account is the same.

To date, we have set up 14 private label managed accounts and each one is different. This is because advisers and licensees tend to have slightly different takes on what it needs to look like or what it should be able to do. For example, we have needed to cater for negotiated rebates on managed funds to lower the costs of managed accounts.

We are starting to see practices introducing managed accounts into their diversified models through a process we call ‘model-of-models’.

This translates to a sophisticated, multi-asset portfolio made up of a number of managed account models and other investments. Models might include international equities, direct equities, managed funds, ETFs, cash and so on.

We also expect growth from other avenues, including the continued development of broader asset classes to be used in managed accounts, including bonds, as well as the continued evolution and development of international equities.

It could be the use of less traditional assets, such as infrastructure funds that only price on a monthly or quarterly basis.

Ultimately, this involves refactoring the way that the rebalancing algorithm works to accommodate more sophisticated assets and greater offerings for international equities and multi-currencies.

These developments are really off the back of the adviser’s comfort level, but they are also being driven by the fact that managed accounts are now seen as a very suitable solution for sophisticated private wealth groups and high-net-worth clients.

On that point, we think there was a bit of a misconception in the industry that managed accounts would industrialise advice, providing a solution primarily for low balance or disengaged clients.

Our experience, however, is that the industry is now seeing it as a way of automating the investment program for very sophisticated investment philosophies, effectively managing mandates and efficiently managing a range of different strategies, including being far more active from an asset allocation perspective.

From a business perspective, particularly within IFA/high-net-worth firms, we have rarely come across identical investment philosophies. Advisers have different views on how to run asset allocation and the answers to the following questions will be different:

• Strategic asset allocation, tactical asset allocation or dynamic asset allocation?
• Once that’s decided, what actual assets will be used to achieve exposure to different asset classes? Active investing or passive investing? Are managed funds required for particular exposures?
• After that, it’s a matter of looking at capabilities – whether or not advice practices need to partner with external asset consultants, if they have the capability to be the model manager, or whether they need a provider to act in a policy oversight role.

Given there are very different views around these questions and how they relate to each asset class, managed accounts will, depending upon the business, look very different. As no two businesses are the same, the future of managed accounts will involve customisation.

Technology will also obviously be a huge feature in the future, with even better reporting capabilities possible.

Fees will continue to develop to support the ever evolving business models of advice practices. As a result, managed account technology will need to support different fee structures.

Fees for their clients, the addition of performance fees to portfolios or parts of a portfolio, the ability to pay fees to multiple parties, and ‘model-of-models’ technology that support payments to different investment managers.

Evolutionary process

So, industrialisation has happened, but it’s not being applied in the way originally thought.

Instead, some very clever investment intellectual property is being put through a very efficient, automated service (called a managed account), so that it’s a solution for many types of clients and many types of advice businesses.

There’s an almost never-ending list of requirements or variations that can be built into a managed account platform.

The challenge for us, and other platforms, is to continually deliver a highly customised and configurable product that is incredibly efficient at the back-end, and that can deliver what the advice community really wants.

It’s very exciting times.

Matt Heine is Joint Managing Director of Netwealth.

* This article was originally published by Financial Standard in FS Managed Accounts 2017.