Advisers are signing on to managed accounts in significant numbers, but what is causing the explosion?
The managed accounts space is booming. Over the next three years, funds under management is expected to double from roughly $30 billion to $60 billion, according to research from Morgan Stanley.
Those offering managed accounts boast of the benefits, which include greater client transparency, engagement and control. Perks for advice businesses range from increased practice efficiency to richer client relationships, advisers say.
For many, managed accounts are key to breaking down the mystery that shrouds the advice sector, increasing the number of Australians who engage with advisers, forming a financially literate country and pushing the sector towards professional status. As director of distribution at Prodigy Investment Partners Guy Ballard puts it, “Managed accounts allow advisers to increase their value to clients and build client financial literacy, which in-turn leads to greater client advocacy and more revenue opportunity.”
However, there is a catch. Adopting a managed accounts approach may require significant changes to an adviser’s business model. It may also call for a long, hard look at where the adviser’s value lies in the client relationship.
The rise of managed accounts
Managed accounts are not a new service, but only recently have they experienced a rapid spike in growth, explains Institute of Managed Account Professionals (IMAP) chair Toby Potter.
“They have become so popular. Back in 2004, if you'd have asked me how much money is in managed accounts I would have struggled to get over $5 billion,” he says. “By June 2016, we did a survey and we counted $31 billion dollars. We’re doing that survey again this year, and while I haven’t validated the results yet, it looks like we’ve gone over $45 billion.”
Effectively, managed accounts came into existence as a class of product in 2004, when ASIC released a class order which applied, for the first time, specific regulations to the operation of what we call managed discretionary accounts, Mr Potter says. In that class order, ASIC decided to start treating managed discretionary accounts similarly to managed investment schemes, with some relief from certain obligations under the Corporations Act 2001.
The main reliefs, Mr Potter says, were that an adviser did not have to offer a product disclosure statement (PDS) and did not have to run a compliance committee. “However, they had to be operated under personal advice whereas a managed investment scheme does not have to be. You also had to have an investment program which set out how the money was going to be managed,” Mr Potter says.
At that time, the people who wanted to offer managed accounts had two choices: they either treated them like a managed investment scheme – with a PDS and a responsible entity etc – but without having a unit price where the assets are held directly for each investor, Mr Potter says.
“The other model was managed discretionary accounts (MDAs), which is a contract with the client or an agreement-based arrangement that sets out what the provider’s responsibilities are,” he says.
There are various ways managed accounts can be used, both in a platform model and in the MDA Operator model, Mr Potter says.
“In option one, you have your client, your adviser, your AFSL or dealer group and then you have your platform. In a pre-managed account world, you had ‘cash’, ‘term deposits’, ‘managed funds’, and ‘ASX listed securities’. Platforms have added on their SMAs,” Mr Potter says.
“Then you can have approach number two, which is where you put an MDA above the platform and that is operated by an MDA Operator.”
“Approach three, which is the MDA Operator view of the world, is where they offer the services of reporting, administration, custody and fees, underneath which you get a menu of SMAs, and then you have your portfolio.” All of these models are subtly different ways of offering essentially the same thing, Mr Potter says.
Empowering clients and advisers
Question any managed accounts enthusiast on the benefits of offering managed accounts and the words ‘client’, ‘transparency’, ‘client’, ‘ownership’, ‘client’ and ‘the future’ will dominate their response.
The key benefits for advisers in offering managed accounts are centred on what the client gets out of the arrangement, Mr Potter says.
Head of distribution at Praemium Martin Morris adds that managed accounts have an important role to play in filling the client engagement gap in the advice sector. “The level of client engagement that managed accounts drive is under focused in the industry at the moment,” he says.
According to financial adviser and co-founder of Plenary Wealth Julian Nowland, “Using managed accounts has allowed us to switch the client communication on investments from being an admin and paperwork focus into a marketing and education strategy.
“Instead of requesting information from clients to fill out forms or getting permission to buy this and sell that, we can focus on education, keeping clients updated on changes being made to the MDA, why it has happened and how that relates back to client’s lifestyle outcomes.”
Mr Morris adds that managed accounts allow for increased client transparency, giving clients a greater understanding of their investment choices and making for a more engaged and financially literate customer base. Significant cost reductions for clients and tax efficiencies sweeten the deal, he says.
“Advisers receive a lot more engagement at the client level because the client feels they have a lot more control,” Mr Morris says. “The client can clearly see what they've got and make better choices while advances in technology allow the customisation of their portfolios.”
General manager, product and investments at Colonial First State Peter Chun adds, “In a world of post-FOFA, customers are demanding greater transparency of their investment portfolio, and definitely, managed accounts give customers that outcome.”
“Most advisers have a very high customer satisfaction rating but a very low referral rate. The reason being, in my opinion as a business coach, is that the client does not understand what the adviser does in enough capacity to refer them to somebody,” Mr Morris says.
Mr Ballard adds, “As client financial literacy picks up you see an increase in client advocacy and business referrals, which leads to greater revenue opportunity.”
Driving down costs
Another key benefit boosting the popularity of managed accounts is cost efficiency. When using managed accounts, the significant reduction in compliance and reporting work for the adviser brings down costs for both the practice and the client.
Mr Nowland says, “Our back office staff are freed up from a lot of compliance that goes with administering portfolios such as records of advice and portfolio rebalances. “The MDA provider we use negotiates fee rebates from the fund managers, which are all passed back to the clients wrap cash account. The discounts are such that the net cost to the client for the MDA is negligible.
“The reporting and portfolio insight that the MDA provider issues is far more detailed than we would be able to create ourselves. This means we have a lot more up-to-date information at hand and we can tailor the information delivery to the client.”
Advisers get a better service to offer clients, are able to run a more efficient practice and are able to build a more engaged client base because they aren’t weighed down in compliance and administration tasks. They are free to better address the strategic issues of the client without having to pretend that they themselves are investment managers, Mr Potter says.
Mr Nowland adds, “It comes back to focusing on what we are best at – which is providing strategic advice to clients and then outsourcing everything else to experts in those fields. We feel that investment management is best handled by those whose entire focus is dedicated to that day-in, day-out and thus will get a better outcome for our clients.”
Managing director of advice licensee My Planner Philippa Sheehan says, “The communication outcomes are first-class, which improves client retention, compliance and engagement. It also removes a large cost overlay to their business, which allows them to drive more profit and deal with more clients with no incremental costs. “The benefits are immeasurable and it’s simple as that.”
Managed accounts present a real opportunity for advisers to focus on strategic advice, giving them more time and scope to interact with, engage and educate their clients. However, the industry must face several hurdles before managed account usage reaches critical mass.
For one thing, adopting MDA structures within a dealership or advice practice will mean substantial changes to business processes.
“This is not just another product with no change,” Mr Potter cautions. “This means changes to the way the practice works, changes to the way the dealership works – those are issues for people who want to make them the cornerstone of their practice.”
Additionally, Mr Potter explains that some investment options (such as hedging, economies of scale, shorting and derivatives) that don’t fit readily within the managed account structure have been previously accessible to clients through managed funds.
“Particularly for international equities there are some economies of scale – for example some exchanges have minimum parcel sizes which can’t be reflected in individual portfolio, so in Japan you have to buy 100 units and if the shares are $900 a piece, that means unpractical parcel sizes for most retail investors,” he says.
The challenges that advisers face don’t just stem from the structure of managed accounts themselves, however, and the very act of moving clients’ funds into such a product can present challenges for advisers, particularly around potential conflicts of interest.
“Often these things are an in-house product for the adviser because they’re often involved in reviewing the investment program and making decisions about the investment program for which they charge an additional fee, so the best interest duty and the conflicted remuneration guidance makes it very clear that they must prioritise the clients’ interests over their own,” managing director at The Fold Legal Claire Wivell Plater says.
“If they’re recommending a product which is an in-house product, there needs to be an additional benefit to the client.” Advisers need to be very clear around the circumstances under which they move their clients’ funds into their managed account offering, otherwise they risk falling foul of their best interest duty obligations.
Nevertheless, the changes to MDA regulation mean all advisers are now on a level playing field regardless of whether they use a platform or not, which Ms Wivell Plater contends is likely to be a positive thing for the industry.
For advisers, navigating the road ahead means understanding where and how they add value, and how they can best use managed account structures to benefit their clients.
“The really successful managed account advice practices realise that their clients don’t want them to be portfolio construction specialists - they want them to be advice specialists,” Mr Morris says.
“Successful managed account providers have an advice model that charges their clients for strategy not portfolio construction. My biggest advice is for advisers to identify where they add value in the advice value chain and outsource where possible.”
It’s not just clients that stand to benefit from a successfully run managed account offering however, and if trends seen in overseas markets take root domestically, groups of advisers will be able to standardise their investment ideas and the way they’re implemented.
“If you’re in an advice business with a number of advisers that are doing their own portfolio construction, it means that you’re not really accessing the best investment ideas of that group or of that licensee,” Mr Chun says.
“The managed account can really streamline that through centralised portfolio management, because it’s a way to standardise and deliver your best investment ideas to all your clients in a scalable way and be very efficient in rebalancing, and it removes the need to issue a lot of that advice documentation every time you make a portfolio change.”
Joint managing director at Netwealth Matt Heine adds that technology presents even more opportunities for advisers to take advantage of managed accounts, as recent developments allow an increasing amount of the process to become automated. “Because of the range of assets, the frequency of trading and the complexity around the actual rebalance algorithms and designing very unique investment philosophies for clients, implementing managed accounts isn’t something that’s easily done or brought in-house from a technology perspective, but the platforms effectively allow people to implement their business model very quickly and easily,” he says.
“About 70 per cent of our new business opportunities right now would be around managed accounts and what we call private labels, so working with private wealth groups or advice firms that have a well-documented and robust investment process, and then putting our technology over the top of that to allow them to effectively automate their investment process.”
The impact of ASIC’s new rules
Managed accounts may have increased in popularity, but the rules have also changed. In September of last year, ASIC changed the regulation around who could provide managed discretionary services. While there were several changes in the way these products are regulated, the changes to the no-action position will have the biggest impact, Ms Wivell Plater says.
“The key ASIC change is that under the previous regime, there was a ‘no-action position’, which enabled advisers who only had funds invested in a wrap platform to provide a discretionary advice service or a discretionary investment service without having to hold a specific license authorisation, whereas if you were providing an MDA service not within a regulated platform you had to have an authorisation,” she says.
There are presently around 130 to 160 licensees with MDA authorisation, but a far greater number of advisers are providing discretionary services in relation to assets held exclusively within wrap platforms, Ms Wivell Plater says. So far, little has changed in the way these products are delivered,
So far, little has changed in the way these products are delivered, however Ms Wivell Plater says this will all change from 1 October 2018, when all advisers (regardless of whether they are using a platform or not) will need the appropriate licensing to provide discretionary services. “The changes reflect ASIC’s concern about the fact they didn’t know who was providing this discretionary service if they were providing it under the no-action position,” Ms Wivell Plater says.
“They feel it’s a service that’s potentially risky and they need to know and understand who is actually providing it, so that’s a visibility thing for ASIC essentially.”
The regulatory changes may also have ancillary benefits for advisers, says Implemented Portfolios co-chief executive Adam Seccombe. "The removal of the no action letters will drive professionalism as MDA providers will need to comply with higher hurdles of technical proficiency," Mr Seccombe says.
In addition to the changes to the no-action position, ASIC increased the capital requirements for those providing managed account services under the MDA operator licensing regime.
Mr Chun says, “ASIC’s intent behind these changes was to make the playing field level between the product regime – the responsible entity product world – and the MDA operator world, so effectively they’re looking for the responsible entity and the MDA operator to have similar capital requirements.”
The increased capital requirements won’t affect every MDA operator, Mr Chun says, as many already meet the higher bar, but smaller licensees may need to look to alternative arrangements to provide managed account services to their clients.
“The implication of that is that some of the smaller licensees may have difficulty meeting that higher capital requirement. Some licensees are more than capable of meeting the higher bar,” he says.
ASIC made a number of other changes to the way managed account services are provided, including an increase in the level of professional indemnity insurance required by MDA operators, as well as modifications to client reporting requirements. However, both Mr Chun and Ms Wivell Plater say these other changes are relatively minor, though Ms Wivell Plater cautions that some of the guidance provided by ASIC on the way these structures are managed and used remains unclear. “There’s been no clear statement of what authorisation an external MDA adviser needs - an external MDA adviser is the person who recommends the MDA service, and they may recommend the investment program in which the client invests, but they don’t implement discretionary investments, so we don’t have a clear statement of what authorisations they need,” she says.
While these changes can seem mystifying at first, Mr Heine argues that much of the renewed interest in these products has actually been driven by the regulatory shift, adding that managed accounts may also empower advisers to better manage ASICs broader regulatory changes. “Advisers are basically forced to become more efficient these days or they’re going to find it very difficult to survive in the future,” he says. “Advisers are looking at how they can automate almost every aspect of their back office, and managed accounts are just a really natural fit.”
Advice for advisers
There’s a lot to consider when navigating the path ahead, and Mr Potter suggests advisers should seek guidance, talk to advice practices that have already introduced these services and discuss how it has affected their business processes. Additionally, Mr Potter says it’s crucial that advisers work out how they negotiate the licensing requirements; whether they want to become an MDA operator, partner with someone who is or use the SMA structure to meet those needs.
While the way forward will undoubtedly pose some challenges, advisers are currently positioned well to take advantage of these products – not just as a means to add more value to their service offering, but to better align themselves with their clients and their clients’ needs. “Moving forward, there will be
“Moving forward, there will be much more one-on-one activity with the clients and increased automation in the back office - which will in-turn become a lot leaner,” Mr Morris says. “Fees will come down and advisers will have the ability to deal with more clients and thus increased profit opportunity for the adviser.” Mr Morris says the industry has convinced itself that the client is concerned with who constructs their portfolios and the time and IT invested in putting portfolios together. Mr Chun adds, “We now finally have an alignment of the benefits to the different parts of our value chain. Managed accounts are a win for clients, a win for financial advisers, and a win for licensees.
"It’s so transformative when you have an alignment of interests across clients, advisers and licensees.”
Mr Morris says, “Managed accounts are the best opportunity for driving customer satisfaction and driving the industry to a profession, because it opens up the industry and educates the consumer."
The way forward
It should come as no surprise then that the popularity of managed accounts has surged in recent times and is expected to continue its rapid pace of growth well into the future.
Mr Chun points to a recent study by Morgan Stanley that indicated the volume of funds held in these structures in Australia will likely double in the next three years alone – climbing from roughly $30 billion to $60 billion by 2020.
Mr Chun says that a different study found 60 per cent of advisers believe managed accounts will significantly change the financial advice landscape in the same period of time.
Mr Heine contends that this growth is being supported by three key drivers: developments in technology, changes in regulation and shifting client needs. “Technology is really driving the resurgence of managed accounts, or the proper establishment of a managed account industry in Australia,” Mr Heine said.
This view is shared by Mr Chun and Mr Morris, with the latter noting that advancements in technology put power to customise portfolios back in the hands of clients and advisers.
That regulatory changes are working to bring managed accounts into vogue is also a popular opinion, with Mr Potter noting that the new laws are “a reflection of the fact that ASIC appears to understand that managed accounts are operated in quite a number of modes and the regulations are supportive of multiple modes where a dealership can be just the adviser, investment manager, etc”.
What most people in the industry agree upon is that shifting client needs and expectations are key to the growing popularity of MDA structures.
“In terms of the future, I see the industry moving away from the traditional static risk profile asset allocation buckets based on a few multiple-choice questions and move more towards goal-based investing where the portfolios are designed specifically for the client’s short, medium and long-term needs,” says Mr Nowland.
“MDA’s are well placed to pick up on this due to the flexibility of their investment universe and asset allocations.”
SUBSCRIBE TO THE IFA DAILY BULLETIN
- 28 Apr 2017ASIC calls for broader whistleblower definitionBy Linda Santacruz
- 28 Apr 2017Decimal announces MOU with industry consultancyBy Staff Reporter
- 28 Apr 2017US independent picks up UBS and Merrill Lynch advisersBy Staff Reporter
- 28 Apr 2017Goals-based advice 'a fad', says adviserBy Adrian Flores
- 28 Apr 2017Advice firms on lower end of health scale: reportBy Staff Reporter
- 27 Apr 2017Lambert steps down from CountplusBy Staff Reporter
- view all