“MANAGED ACCOUNTS have grown to a $100 billion segment of the industry, in fact it’s the fastest growing part of the wealth management industry,” MLC Asset Management director of managed accounts Jason Komadina says.
“To make a bold prediction, I believe managed accounts will become the default way of implementing investment advice in the future – it’s not going to be a one size fits all, but a dominant part of the way advice businesses are run.”
Recent research from Investment Trends reveals 60 per cent of advisers are either using managed accounts now or want to use them, and that adoption has been growing steadily in the past three years.
“Two things are happening at once in the industry – one is platforms have evolved to the point where they can administer a wider range of solutions, whereas 10 years ago managed accounts were SMAs for equities and they didn’t solve the problem for a full portfolio,” Mr Komadina says.
“At the same time everyone’s lives have got harder – consumers are more time poor and advisers have regulation in the form of FASEA, best interests duty and other requirements that are getting larger each year.
“Something’s got to change in that equation for people to run an effective business.”
Mr Komadina says the COVID pandemic has also proved a catalyst for a number of advice firms that may have been waiting to move on implementing managed accounts into their practice, as the pace with which volatility occurred proved that advisers will need a more agile set of tools to help clients achieve their goals.
“During the GFC from the Lehman Brothers’ collapse to the bottom of market was 18 months, so there was a lot of time to talk to clients, change portfolios and work with their goals,” he says.
“Roll forward to 2020 and from when COVID got serious to the bottom of the market was six weeks. Suddenly you’ve got to think about how do I understand what’s happening to know what to do with the portfolios, how do I do something about it.
“If I’m in a traditional advice process, I’ve got to get the client in for a meeting, produce an SOA, have them approve it and put the trading on the system. Best case that’s four weeks. The next conundrum is I’ve got 70 clients, who do I see first?
“Advisers had this happen in March – they had clients calling up saying what do I do, versus advisers who already used a managed account could implement that decision and be more free to talk to their clients and add value around that. It was a time where a lot of those advisers actually picked up business. But if you’re in the minefield of dealing with incoming phone calls, that’s where a lot of advice firms realised they need to do it differently.”
Given the evolution of managed accounts beyond the simple SMA structure that was more common in the early days, Mr Komadina says advice practices are able to use managed accounts in a more flexible way to take account of their client base.
“They can transition their business wholly to a managed account model, or they can do 90 per cent because there will be some clients that want a more bespoke relationship,” he says.
“Some practices who have enough scale might have managed account one and managed account two so for the simple clients, a lower-cost portfolio where they want active allocation but using ETFs to implement, and a version for their larger clients who want more complex solutions that is fully active management.
“The platform solutions now can do SMAs, MDAs and allow you to run your MDA on their service. You can choose what structure you want to put around that, so do you want a more product experience like an SMA, or an advice service which is an MDA.
“You can also be the investment manager if you’ve got the right governance and expertise in your business, and there’s levels of partnership or outsourcing as part of that.”
Mr Komadina says the choice to use managed accounts really lies in where the adviser believes they add value to the client – through being an active portfolio manager and stock picker, or through helping counsel them about their broader financial circumstances and decisions.
“Some clients may want something ultra bespoke in which case the traditional process is perfect, if you are happy to have some of the trade-offs,” he says.
“It depends on what the adviser wants to achieve – do they really want to get into the weeds of constructing the portfolio, versus someone who values servicing clients, providing strategic advice i.e. goals, needs, tax advice, estate planning, insurance, everything that is not investments.
“From a client perspective it comes back to the experience they want. I’ve worked in practices where you have large clients who are happy with a multi manager fund, because what they value is the conversation with the adviser and they are less concerned about the nuts and bolts of investments. “A lot of clients love to have a deep investment conversation with the adviser, others don’t, so part of this process will be understanding what your clients value.”
For those who do choose to use managed accounts, the productivity benefits are significant, with Investment Trends research revealing advisers who use them save an average of 13 hours a week in administration time.
“That’s like getting back a third of your time so it’s not small. It comes from the reduced admin burden around many things – the investment trading and around SOAs, ROAs, sending them out, getting them
back from the client and the natural follow-up that occurs,” Mr Komadina says.
“It manifests itself in more office administrator time and adviser time because you’re not preparing the things you don’t need. If you think about what can I use that for, you can take that as a profit increase to the bottom line, but most will use it to grow their business.
“If you free up your back office time, you can spend more time with clients and use it to prospect more clients and get more referrals. In theory, if you’re taking way 20 to 30 per cent of your admin work, every client is 20 to 30 per cent more profitable.”
Besides the tangible benefits, advisers can often find themselves having more relevant and better quality conversations with clients too, by way of eliminating a lot of the paperwork that neither the adviser nor client really appreciates.
“We did a piece of work around changing an SOA document from 50-60 pages to something less book-like. We took a smaller version to clients and the question we asked was how you feel about this?” Mr Komadina explains.
“The answer was ‘Every quarter my adviser sends me a big thing to read, I read it, mark it up and in the meeting I feel compelled to ask questions because it looks like someone’s put some effort into preparing it. But I really don’t want to talk about this – what I want to talk about is when’s my next holiday, spending time with my grandkids, which charity do I want to support.’
“There’s an opportunity to reframe the relationship to be more about the client and much less about the assets in their portfolio. Often in an hour long meeting, 50 minutes is spent talking about why BHP, why not Rio. Do clients really value that? Some do, some don’t. If advisers find it’s really not hitting the client value they’re looking for, this is a way to change the conversation.”
Looking ahead, Mr Komadina believes that platforms will get better at providing more tools for advisers to use alongside their managed account solutions as their value proposition transforms from product to service- led, including simpler reporting and more content to help advisers engage with clients.
“The next wave is going to be how do you service clients better, how does a platform enable digital communication and the tools to support that, and how does an investment manager provide content as a part of that,” he says.
“That will be part of our content journey, as well as how we provide simpler to understand pieces of reporting for client bases. How advisers use those will continue to evolve – people will come back to what is their value proposition and where in the spectrum from strategic to investment advice do I want to live, and once they work that out it’s how do I want to do it, do I want to partner with someone or do it myself.”
Bringing transparency and value to clients
For Daniel Aiello, director of financial planning at holistic wealth firm U Financial, managed accounts offer a convenient solution to keep his millennial clients engaged while minimising the amount of admin time he spends on portfolio management each week.
“The main reason we started using them was the lower cost and the ability to have transparency of what you’re invested in,” Mr Aiello says.
Mr Aiello was previously managing portfolios of ETFs for many of his clients, but switching them across to MLC’s Value managed account offering has allowed him to take a back seat to the day-to-day buying
“Clients love the transparency, they love the fees and the fact these are invested in ETFs. I was looking for something that was going to fill that gap – I didn’t want to manage it all myself because I’m not an investment manager,” he said.
“I wanted to leave it to the experts, but I felt there wasn’t a solution out there that would be index-based but also have the active overlay of someone overseeing it and saying maybe we should sell out of this or that.
“Previously, I would need to be adjusting the asset allocation myself based on what I think the world is doing at that time. This is allowing me to take a hands- off approach – the reporting [MLC] provides is really simple to read and understand in terms of the changes they’ve made to your portfolio.
“I’m still keeping an eye on the portfolio performance and reasoning for their decisions, but I don’t have to constantly monitor it and it’s really made my business more productive.”
For cost-conscious younger clients, being able to access a broad range of diversified investments at a lower cost than a traditional wrap platform is also a plus, Mr Aiello says.
“I’ve been moving clients across progressively on an annualised basis as part of our reviews – we always assess and compare what they’ve got with others in the market,” he says.
“We had a lot of clients in MLC Masterkey because it was the cheapest option but given the ability to access a broader range of investments, we have been making the change with a lot of clients, and in terms of clients in a wrap it was a no brainer.
“Compared to similar portfolios in other platforms, nine out of 10 times this comes out on top in terms of costs. It’s a really easy sell to the client if you say it like that because they’re adding sophistication to their investment and a lot of the time they’re doing it at a cheaper cost.”
Mr Aiello says the ability to invest through super has also allowed his clients to get more engaged with what their retirement savings are doing, through being able to have full visibility of portfolio holdings.
“It’s essentially index investing but you can see exactly what you’re invested in and what your allocations are,” he says.
If you had this money outside of super you would want to know where every dollar is going, so it’s bringing that philosophy to super and engaging your clients a lot more into their super – that’s what we want to do long term.”