Managed accounts have become very popular with financial advisers over the last few years mainly due to technological and regulatory changes. These changes have meant (amongst other things) that clients are able to invest directly in a range of instruments and advisers can earn portfolio management fees.
What are Managed Accounts?
There is a range of confusing acronyms such as MDA, SMA, MIS and IMA etc that a potential investor has to understand.
A basic managed account service will contain three main components – Services, Elements and Roles which is the basis for this definition of a managed account:
- Delegation of the management of a portfolio of assets by an investor to a suitably authorised manager, generally at a cost;
- On the terms set out in a standard offer document/agreement rather than an agreement specific to a single client; and
- And key to the offering – where the administration of the portfolio is an integral part of the overall service
More technically, the Institute of Managed Accounts Professionals (IMAP) has provided a rigorous definition at their website: https://imap.asn.au/publications/glossary.
Some key points made by IMAP are that:
‘Most terms have grown up through use and adoption and many do not carry a legal definition. There are legally defined terms that relate to the managed account market, the Corporations Act, ASIC Act and the relevant regulations, including the MDA related regulations, LI 2016/968 and RG179. The Corporations Act is the primary source of law for financial services and financial products. However, as managed account services of various types have been developed, words and terms not specifically defined in the Corporations Act have come to mean what the user wants them to mean’.
Why are advisers turning to managed accounts?
When a managed account is set up through an MDA structure this means that client has authorized their adviser to make investment decisions on their behalf for designated strategies.
Essentially, this means that a Managed Account (as explained by managedaccounts.com.au) can potentially benefit advisers and their clients in a number of ways:
- Clients beneficially own the investments in their Managed Account allowing for full flow-through of all dividends and franking credits. This can be done individually (IMA) or in ‘bulk’ (SMA).
- The Investment Manager develops a Portfolio which reflects the investment objectives and approach of the selected Investment Option. The clients’ Portfolio applies these same rules.
- The adviser can select a tax methodology that suits their clients best.
- The day to day administration of running direct portfolios is managed by professionals: Investment Managers manage the adviser clients portfolio, a Custodian holds the investments and cash on their behalf, and the ‘platform/administrator provider’ as administrator operates the adviser client Managed Account, and
- undertakes transactions on the client’s behalf,
- handles all reporting and record keeping, and
- provides online resources to help the client administer and track their investments.
Practically, managed accounts have been established in a range of single asset class sectors (such as Australian and global equities) as well as multi-asset portfolios.
How rapidly has the sector been growing?
Recently (26th March 2018), IMAP / Milliman released the latest managed account census data for the year ending 31 December 2017.
As at 31 December 2017, FUM in Managed Accounts stood at $57.04 bn. This balance represents a six month increase of $9.08 bn (or 18.9%) on the 30 June 2017 FUM total of $47.97 bn. For the 12 months “year on year” period this represents an annual growth rate of 45% or $17.87 bn in FUM.
IMAP estimate that “$3.37 bn of the increase is due to inflows of new funds from existing participants growing their Managed Accounts business, compared with $4.4bn in previous 6 months period. Totalled for the past 12 months gives a figure of $7.88 bn new funds inflow for 2017”
Indeed, IMAP are recognizing best practice in the managed accounts sector and have announced the inaugural IMAP Managed Accounts Awards which will be held on 1st August 2018. Nigel Douglas from Douglas Funds Consulting is one of the independent consultants on the Awards Committee.
Potential pitfalls and how navigate them
There would appear to be considerable upside for managed accounts growth as the sector is relatively small compared to the total for Masterfunds, Platforms and Wraps which is reported by Strategic Insights at $ 821.4 bilion at December 2017.
However, there a number of risks (‘pifalls’) that include:
- Portfolio management risks if the Investment Manager is not skillful and able to consistently add value (after fees) compared to relevant benchmarks;
- Overly concentrated portfolios (limited number of investment positions);
- Implementation costs if the platform/managed accounts provider has relatively expensive and inefficient trading capabilities; and
- A limited range of investment strategies are available in some asset class sectors at this stage.
In order to assess these risks and identify managed accounts portfolios that are likely to outperform over the medium to long term on a risk adjusted basis, there is scope to appoint independent consultants to rank the options available and / or develop new products. Note that various well known retail rating houses already have extensive experience working with advisers but need to be assessed themselves.
Platforms have therefore sought independent consulting advice to assess multi-asset managed accounts portfolios and this has been a service offered by Douglas Funds Consulting who have completed projects for clients over the last year.
Fund managers also need advice as to whether offering managed accounts (such as SMAs) is an appropriate strategy relative to other options such as active ETFs or managed funds. Many firms including Gateway Financial offer this service.
Note that there is no commercial relationship between Douglas Funds Consulting and Gateway Financial
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