Look inside before you buy
Managed accounts offer plenty of benefits to investors, but practices need to consider the big picture.
We have entered an era where technology allows companies to cater to the needs of individual customers in ways never thought possible. Mass customisation is now a reality and managed accounts are playing a key role driving the trend in the wealth industry.
Managed account funds lifted by more than 21 per cent to $39.2 billion over the six months ended 31 December 2016, according to the Institute of Managed Account Professionals.
Since then, that growth appears to be accelerating as investors flock to the structure.
There may be plenty of managed account varieties with subtle differences, but they’re effectively all just a share or balanced fund without the ‘fund’ wrapper.
They all enable investors to control their individual investments and tax liabilities, unlike many other structures. Clients own the underlying assets and the fund manager has discretion to buy and sell any type of asset on the platform.
The benefits are clear but advisers and dealer groups still need to look at two key areas before going down the managed accounts path: choosing a partner to manage client assets and assessing operational risk.
In-sourcing funds management needs to be carefully considered
A rising number of practices are now considering setting up and running managed accounts themselves (although some major trustees/responsible entities still require practices to use a consultant).
Internalising funds management allows a practice to exert even greater control and retain more of the wealth management value chain. However, deciding to become a fund manager also fundamentally changes the nature of the practice by introducing new risks.
It may not be common to hear from fund managers, but personal advice is more important than investment returns. All too often, clients can’t stick with their financial plan when placed under stress, making returns irrelevant.
Controlling (often self-destructive) client behaviour is crucial and something that financial advisers are best placed to achieve by building strong relationships.
The importance and inherent unpredictability of the human element is easy to forget, when internal resources are diverted towards generating investment returns rather than understanding clients. The challenge of delivering robust investment returns is particularly difficult in the current environment where asset prices have been inflated by loose monetary policy around the world.
Future investment returns are unlikely to match those of the past decade, which potentially puts practices in an awkward position. Practices managing money in-house need to rank their fund management capabilities against external providers’ fees, track records and risk management capabilities – or risk questions from the corporate regulator. Poor performers can always be fired – but that’s more difficult when you are the poor performer.
In such a challenging environment where client behaviour will be tested, it is far easier to make a strong value proposition to clients based on personal advice.
Operational due diligence is often overlooked
Investment returns grab the spotlight, but appointing a fund manager (or internalising asset management duties) is about far more than investment philosophy, process, portfolio composition and performance.
Operational due diligence is all too often neglected despite the severe lessons from the global financial crisis when a number of fund managers struggled or collapsed. The prudential regulator is well aware of the issue and has been encouraging super funds to focus on it – practices and dealer groups should also heed those lessons.
An investment manager (or a practice managing money in-house) should have a dedicated operations resource. Preferably, they should be supported by a business intelligence package that automates execution by incorporating the different rules and preferences of all clients and platform mandates.
Unfortunately, some investment managers hand this responsibility to their analysts or portfolio managers. Some roll the analyst, portfolio manager and operations manager duties into one position. This is not just an operational risk – it is also a factor that can drag down returns and deviations from risk profiles.
Some fund managers or consultants only ever recommend one platform but, given the differences between functions and features, this is unlikely to be in the interests of all dealer groups, practices and their clients.
Like investment skill, operational skill should be tested. Has the investment manager managed money before or are they back-testing theoretical model portfolios?
If model portfolios are used, has the time frame been selected to justify the result?
It’s common to ask how a manager’s returns have stood up through a range of market cycles and downturns, but similar questions are called for about their operational and business strength.
Managed accounts offer many benefits but it’s crucial to look deeper before you make a choice. Just because there isn’t a wrapper, there can still be shiny packaging that distracts from what’s really inside.
Checking out the detail will help you avoid disappointment.
Dan Miles is the managing director and co-chief investment officer Innova Asset Management.
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