Managed Accounts: the path less travelled

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Thomas Bignill
Managing Director
Mason Stevens

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Patricia Chan 
CFP® CA
Managing Principal
DFS Advisory Services

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Patrick Nalty
CFP®
Managing Director
Paradigm Group

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Matt Lawler
Executive General Manager - Wealth Management
OneVue Group

Perspectives asks four industry professionals the following question:

Q: What do you think are the three things that will drive the growth of managed accounts?

I believe the three things that will drive the growth of managed accounts are:

  1. Client needs changing

Investors are consuming advice (products and services) in a different way. They demand transparency, instant information of their portfolio and performance, and greater transparency.

Transparency is probably key, as it allows advisers and clients to assess a manager’s transactions, holdings, fees and expenses, and sources of return. Post the GFC, knowing how their wealth is being invested gives clients peace of mind, and builds further trust with their adviser, which in turn creates advocacy.

The other key client need which has changed is a requirement to be able to invest globally across asset classes, primarily in direct international equities. Managed accounts enable advisers to do this, where they previously weren’t able to.

  1. Cost and scalability

Advisers are continually faced with multiple challenges around growing their business in a compliant, cost effective and scalable way. There are different ways they can achieve this, and we are seeing advisers use managed accounts as the one way to differentiate themselves and their services.

This way, they have the opportunity to invest in direct assets, such as direct international equities or direct bonds, coupled with managed funds and ETFs, so that the client has a diversified direct solution.

Additionally, increased regulation has been one major catalyst for the large take up of managed accounts, because it allows advisers to get scalable investment solutions managed by a professionally structured investment committee.

  1. Advisers becoming independent

We have also seen a growing number of advisers depart larger institutions to establish their own practice, either by becoming AFSL holders (single or multiple office holders) or joining independent groups. According to ASIC, there are approximately 3,700 AFSL holders (as at August 2016), but with technology advancements and clients demanding more transparency and value, we believe this number will likely rise.

As more advisers start realising the benefits of managed accounts, we expect funds under advice to grow along with this.

Advisers are evolving; many are actively differentiating their service offering and in turn, seeking to take greater control. Solutions that seek such differentiation are no doubt positive growth catalysts. Consequently, managed account solutions need to become business solutions, not product solutions.

Advisers want to be at the leading edge, not the bleeding edge, as trust is the major currency of advisers. No sane adviser will risk losing clients’ trust by recommending any service that has question marks around deliverables. While adviser confidence has increased in recent years due to improvements within the managed account industry, there is still some way to go.

Each managed account solution has its pros and cons, and advisers still need to be realistic and accept some gap levels in current offerings. A positive managed account service experience is powerful and the major pre-requisite for meaningful industry growth.

Growth will come from advisory groups seeking to differentiate themselves by creating bespoke service offerings. With managed accounts, there is greater scope to tailor to adviser business needs and incorporate the expertise of asset consultants and investment managers to create customised solutions.

With the ability to select from ‘modularised’ managed account solutions and retaining branding control, differentiation is now within reach. Even managed account operators are now available for hire…who would have thought?

We all wish to work smarter, not harder. Further advancements in business (rather than product) solutions will deliver better practice efficiencies, which has strong appeal. This will ultimately improve trust among advisers and encourage them to take the less-travelled managed account road.

As advisory firms start thinking about their business models going forward and start breaking away from the traditional institutionally owned models, they will start looking at alternatives to the restrictive nature of wraps and managed funds.

Advisers who understand the value that a managed account can offer to their clients by holding beneficial ownership of the investments, will allow them to make use of all the relevant tax advantages, like franking credits and CGT analysis, as against holding units in a managed fund.

This will allow advisers to become more relevant in the investment value add, and advisory firms that get their own licence will have a lot more control over their own APL.

Managed accounts are also a very transparent way to interact with clients, with full disclosure of all costs and transactions, thereby enabling an investment management fee to be charged to the client for managing the portfolios.

Therefore, for advisory firms that want more control and greater transparency over their client portfolios, and that wish to position themselves as the investment manager, thereby becoming more relevant in the client-adviser value chain, then managed accounts are the solution.

This all bodes well for the future growth of the managed account industry.

Platform and managed account decisions start with the client.

Re-engineering advice practices from an ‘old’ business model to a ‘new’ business model must start with the client and the experience you want them to have, before making any decisions on platform choice.

With a proliferation of platforms in the market, advice practices tend to make decisions about which platform to use based on a product decision, often at an individual client level. In some cases, practices will have up to six platforms, which is counterintuitive to the role a platform should play in an efficiently-operating business.

In our experience, high performing advisory practices take a more strategic view of the role of platforms, founded on redesigning the client experience and its outcomes.

Managed accounts, a more flexible modern platform, have offered practices greater scope beyond traditional ‘one-size fits all’ platforms to customise their operating processes to become more efficient and responsive.  

Choosing a managed account to make your practice more efficient is more than simply selecting a new investment option. The following are five key issues to consider before you make the leap:

  1. Client value proposition (CVP)        

Clearly define the processes that deliver this promise and ensure they are documented and repeatable, specifying what services are delivered and the fees to be charged.

  1. Investment Philosophy                 

Understand what role the portfolio plays in delivering to this CVP. For example, a goals-based CVP is likely to require an ‘inflation plus’ type investment approach.

  1. Portfolio construction

Enlisting the advice of specialists can save time and enhance the performance of your portfolios. Break down the construction of portfolios into asset allocation, sector construction and fund manager research, and use specialists to assist you.

  1. Implementation                                

Implementation of the investment portfolio is critical. Many businesses have made decisions on platform ‘bells and whistles’ and ‘toys’, rather than focusing on ‘industrial strength’ processes that systemises implementation and frees the practice up to deal with more valuable discussions with clients and generating new clients. This is where the platform assessment and decision starts!

  1. Review and refine

Ongoing management of portfolios adds significant value to a practice, maintaining advice from specialists to benchmark and allow for changes in markets. Managing portfolios via managed accounts allows you to take a long-term view, but periodic assessment and refinement is critical.

If a practice starts with the client in mind and works backwards, they can re-engineer their business model in this dynamic and competitive environment. Platforms and portfolio implementation options, like managed accounts, play an important role, but are most successful when there is a clear view of the client experience and the role that the investment portfolio will play in delivering that experience.

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