SMAs – at the tipping point?

Since their somewhat subdued entry into Australia, separately managed accounts (SMAs) are finally living up to their market disruptor potential.

It seems everywhere you look there’s another article about the virtues of the SMA, or a press release about a new organisation launching their own-branded version. So, what’s going on? And more to the point, should you be looking at SMAs for your business?

The SMA appeared on the scene in Australia as early as 2005, riding on the back of colossal success in the US. Early adopters drove the sector, quick to recognise the advantages of beneficial ownership, drifted weightings, automatic rebalancing, brokerage charged in cents rather than dollars, comprehensive reporting and automated corporate actions. But even with the obvious gains in business efficiency and client engagement, SMAs remained a niche solution for years.

Suddenly, this year’s Institute of Managed Account Professionals’ managed account survey results have identified a 137 per cent increase in total reportable funds under management (FUM) in just a year, up from $13 billion in 2015 to $30.874 billion in 2016. It would be hard to find another financial services sector growing at this rate during the same period.

And experts don’t foresee any slowdown in the SMA trajectory. The influential 2016 Morgan Stanley report, Managed Accounts – Evolution or Revolution, predicts that by 2020 the SMA total FUM will reach $60 billion, and that 75 per cent of industry net flows will be through SMAs!
This prediction has advisers researching how to take advantage of this growth sector, and asset managers researching how to manage the risks they face from the SMA sector becoming the dominant solution for advisers and investors.

Grabbing attention

A major impetus for the meteoric rise of the SMA was the Future of Financial Advice (FOFA) reforms. The ban on volume rebates presented a significant challenge for organisations, large and small, who had relied on these rebates to run their businesses. They had to quickly adapt to market forces, to find efficiencies and build scalability into their businesses, and to focus more on client retention and gaining new business. SMAs provided the answer.

Wealth management firms with significant FUM (over $100 million) have found in SMAs a strategic opportunity to grow revenue by developing their own models and outsourcing the asset consulting to external partners; some even take advantage of the SMA structure by white-labelling. Although smaller organisations are not typically running their own models, they too are white-labelling SMAs for their businesses. With administration greatly reduced and investment management outsourced to experts, financial advisers can dedicate themselves almost exclusively to knowing their clients, relationship management and sales.

Jamie Panelli, Infocus senior financial adviser, commented, “We find using the Infocus Managed Account solution has real advantages for both our clients and the business. Our clients benefit from a low-cost investment portfolio that is professionally managed by Morningstar and offers absolute transparency. The business benefits from the reduction in administration, which has allowed us to concentrate on relationship development and new opportunities. We continue to receive client referrals as a result of the unique SMA offering.”

Going mainstream

There are no signals that indicate the slowdown of the SMA sector anytime soon; in fact, all signs point to SMAs becoming embedded in the bulk of advice practices. As an example, most industry conferences now include a focus on the SMA sector, its opportunities and business risks, including the risks inherent in non-adoption.

Tellingly, sectors that do not traditionally rely on FUM are adopting SMAs, such as the stockbroking sector. Broking firms have found that their traditional business model is becoming less competitive and are looking at ways to move away from one-off charges to increasing recurring revenue.

Developing proprietary SMA models has proven an attractive option for forward-thinking broking firms, as an SMA not only develops recurring revenue streams but creates greater administration efficiency and the ability to deliver solutions to lower-net-worth investors that they previously had to turn away. A recent SMA adopter, Shaw and Partners stockbroking firm commented that “an SMA allows our advisers to deliver portfolio management to their clients in a more efficient way and at a lower cost than the traditional broking model”.

Importantly, SMA specialist administration and technology providers are able to offer solutions that can cope with the complexity of wealth management firms, stockbrokers or even banks and family offices. The traditional platform market has been unable to serve the SMA market, and as such may not continue to be relevant.

And into the future

Early adopters now have mature SMA business models and are growing rapidly. New wealth management firms are incorporating SMAs into their business models, sometimes simply to remain competitive in the new environment. New sectors are looking to build SMAs into their business models, and platform providers are building more sophisticated technology to service this burgeoning market. It is clear the SMA sector is becoming a ‘first-choice’ solution for the financial services industry, now and for many years to come.


Martin Morris, head of business development at Praemium

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