Managed accounts enter the mainstream

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Over the past two years, as a result of changing global consumer and economic trends, investor use of managed accounts has grown exponentially with increasingly mainstream adoption. In 2016, Morgan Stanley estimated funds under administration (FUA) in managed accounts in Australia would reach $60 billion by 2020.

A managed account provides consumers access to a range of professionally-managed multi-asset investment models which can be tailored for the individual investor. Investments within a managed account can typically be combined or co-mingled with other assets held by investors and reported on as part of a broader portfolio.

Often compared to managed funds, where money is pooled with other investors, managed accounts differ in a vital way. Investors hold the underlying assets in their own accounts, which gives them greater control, transparency and flexibility over those assets.

Technology and changing attitudes drive demand

Superior technology and a change in consumer attitudes have been big drivers of this new interest, as well as regulatory change in the financial services industry and even the GFC of almost a decade ago. The GFC rocked financial advice practices and consumers alike, creating an appetite for change and a desire for increased accountability and transparency.

The Future of Financial Advice (FoFA) regulations introduced in July 2013 increased the burden of compliance on financial advisers, while also raising the need for transparency. The changes in the regulatory environment gave managed accounts a platform to thrive.

Managed accounts, which have the ability to monitor, transact and rebalance across multiple tailored portfolios in a cost efficient and transparent way, were the answer to many consumer concerns as well as adviser business challenges. Technological advances also made it easier to store and process data, allowing more complex portfolio construction and greater levels of customisation.

Although historically managed accounts were typically niche, stand-alone and separate products to an investor’s main wrap or investment service, managed accounts can now be accessed via many investment and super platforms making them far more convenient.

Key benefits of managed accounts

Transparency: Managed accounts allow transparency to view the underlying assets that make up the investment portfolio to truly understand and know which companies and assets are held. Unlike a managed fund or an Exchange Traded Fund (ETF), which will often provide limited information such as the top 10 stocks held, when you invest in a managed account you know exactly the construct of the portfolio and the actual underlying investments – which may in fact also include managed funds, domestic and international shares and / or ETFs for different sector exposure.

Tax effectiveness: Managed accounts provide tax benefits which are attributable to an investor’s own holdings and not netted out or reversed by the actions and cash flow of others, as is often the case in managed funds where the assets are pooled. The managed account structure also means investors avoid embedded capital gains (CGT) tax implications accrued within a managed fund, which although they may have been generated historically, may be held over and attributed across all investors.

Control: The unique ownership structure also gives investors control to exclude assets from their portfolios, a level of detail not possible in managed funds. For example, if there is concern about the social or environmental actions of a company, it could be excluded from the portfolio.

Like managed funds, managed accounts give access to professionally managed investment portfolios. Given the dominance of managed funds in Australia and our familiarity with them, a comparison is a good way to understand and assess if managed accounts are right for a particular circumstance.

Whilst there are many benefits to investing via a managed account they are not always the best solution for everyone. For example, a typical Australian equity managed account may hold between 25 and 30 stocks and would therefore not be appropriate for someone with a small amount to invest or looking to further diversify across other asset classes.

Likewise, because managed accounts typically offer concentrated listed portfolios they do not give the same diversification benefits of many managed funds or asset class access. For example, a typical Australian or international managed fund may hold in excess of 80 stocks or seek to deliver a long short strategy which is not possible through a managed account given the need to short stocks.

Financial advisers look to deliver a better client service

Managed accounts have also given financial advisers tools to more efficiently manage their client portfolios, freeing them up to provide the support and services consumers are looking for.

The highly-regulated environment in which financial advisers currently operate means they must demonstrate they are operating in the best interests of their clients, providing them with a consistent and repeatable level of quality service.

In the recent Netwealth AdviceTech Research Report, of more than 200 advisers surveyed, 35% reported they were currently using a managed account with their clients. A further 22% said they intend to use them in the next 18 months and 27% were considering them.

Selecting a managed account

The key question consumers need to ask is whether the managed account product offers the sophistication that is now possible. Investors should consider:

  • Can they access a range of investment styles and assets in a single portfolio?
  • Is it possible for assets in the managed account to be bought, sold and managed as part of their broader portfolio?
  • How does the provider trade the portfolio and potential CGT implications of switching models?
  • What is the legal structure of the managed account and does it provide suitable protection against administrative or mandate errors e.g. is it a Managed Investment Scheme (MIS), a Managed Discretionary Account or some other structure?
  • What is the performance drift impact of heavily tailoring a portfolio by including, excluding or substituting assets?
  • Who is the managed account investment manager that will be relied on for investment decisions, and are these right for the investor?

The next wave of managed accounts will see investors even more vigilant over what their chosen provider can offer them, and as the industry enters the next phase, innovation and competition will ultimately benefit both advisers and consumers.

Managed accounts are not for everyone, and like other financial products, it is always prudent to speak to a financial adviser to understand not only their benefits but their risks.

 

Matt Heine is Joint Managing Director at Netwealth Investments Limiteda provider of Managed Accounts. It contains general financial product advice only and does not consider the objectives, financial situation or needs of any individual investor. The information provided is not intended as a substitute for professional financial product advice.

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2 Responses to Managed accounts enter the mainstream

  1. Gary M September 14, 2017 at 12:39 AM #

    There’s another important question investors should ask: – ‘can assets be transferred out to another platform or another managed account ‘in specie’ without triggering tax, spreads and brokerage?’
    Ideally, investors would want transfers of assets (eg units in managed funds, shares, etc) from one platform to another in specie (and therefore not trigger sales/CGT/brokerage/spreads).

  2. Matt Heine September 14, 2017 at 8:45 PM #

    Hi Gary, that is a good point. If the investments are held in an “IDPS” (investor directed portfolio service) also known as wrap an investor can always transfer assets out with out triggering CGT as they are the beneficial owner. If the managed account is part of the wrap depending on the legal and product structure this may differ between offerings and definitely worth checking. In the case of a super wrap CGT will always be triggered when moving to another fund as it is a different legal structure and trustee however assets may be transferred in some cases avoiding brokerage and / or buy sell spreads.

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