How to Navigate the Complex Managed Accounts Ecosystem

The stellar growth of the managed account sector means financial planners have an unprecedented choice when it comes to selecting cost-effective ways of delivering investments to their clients, while optimising their core skills in providing strategic wealth advice and support.

According to the Institute of Managed Account Professionals, funds under management in domestic managed accounts stood at $62.12 billion as of 31 December 2018, an increase of $2.49bn (4%) in the second half of 2018.

The sector grew despite a period of heightened market volatility and uncertainty about the impact of recommendations flowing from the Hayne Banking Royal Commission.

But no managed account structure is the same and planners need to navigate an ‘acronym soup’ of variations including separately managed accounts (SMAs), managed discretionary accounts (MDAs), unified managed accounts (UMAs) and the more bespoke individually managed accounts (IMAs).

Understanding the Different Business Models

The managed accounts ecosystem is fast changing, with new business models and new investments to choose from.

In essence, practices have the choice between the fully outsourced approach of using platform providers and third party providers, or the ‘do it yourself’ approach of using their own financial service licence to offer managed accounts.

Regardless of the approach, all managed account structures hold an advantage over managed funds because the individual assets are not collectivised but remain directly owned by the clients.

In simple terms, an SMA is a financial product consisting of underlying financial investments. The responsible entity managing the SMA obtains the autonomy to trade in the absence of continuous end-investor approval.

Unlike an SMA, an MDA is classed as a service agreement rather than a financial product, with the planner authorised to provide both advice and discretionary investment management within parameters agreed to by the client.

An MDA licence can be attached to the dealer group’s licence. Advisers can also use a third party’s MDA licence not related to the dealer group, whereby the third party retains all risk in relation to the MDA.

The structure may also allow a third party such as an advice practice to construct investment portfolios.

The Right Model for Your Planning Business

When selecting the ideal managed account  structure, the key considerations for financial planners include whether the practice has its own licence and the firm’s level of resources. For example, does the firm have the appropriate expertise to construct its own portfolio management service?

A ‘no’ to these considerations should perhaps lead planners down the path to consider less hands-on SMAs offered via platforms (which provide the option of model portfolios that access the expertise of underlying professional investment managers).

Many platforms provide access to fund manager SMAs. According to the State Street Global Advisors SPDR ETFs/Investment  Trends 2019 Managed Accounts Report, 16 platforms offered professionally-run managed accounts compared with only three a decade ago.

For a well-resourced practice, holding an MDA licence confers enhanced flexibility in terms of how the advice process is structured.

Considering Your Clients’ Needs

Naturally, the selection process cannot be divorced from the real needs and expectations of clients. For example, what is the service the clients believe the firm provides and how do managed accounts align with this process?

In assessing whether or not to adopt managed accounts, planners need to be able to see the wood for the trees in terms of how these solutions stacks up against other low-cost options. For instance, direct investments in exchange traded funds (ETFs) may be more suitable for clients seeking an indexed exposure to an asset class.

Current trends reveal a likening toward MDAs, which tend to retain more of the investment decision making — and the revenues — at the firm level. 

The responses from 722 planners found that among managed accounts users, 68% deploy managed accounts using on-platform SMAs, down from 80% a year ago. Further, 40% of these planners are using MDAs, up from 30% previously.

But no MDA model is the same. After discounting some overlap in the responses, the survey found that 31% use an MDA through an external third-party adviser and 11% do so through their own licence.

Interestingly, users of SMAs, own-licence MDAs and third party MDAs share similar motivations such as reduced compliance and regulatory burdens, but they differ in their view of which vehicle best delivers these advantages.

Interestingly, users of SMAs, own-licence MDAs and third party MDAs share similar motivations such as reduced compliance and regulatory burdens.

Of the current SMA users, 51% cite SMAs as less risky for the practice relative to MDAs, with lower compliance and regulatory burdens.

Other less commonly perceived benefits of SMAs include a wider availability of professional investment managers, access to research coverage and the easier justification of fees and value.

However, users of an in-house MDA cite greater flexibility and control over individual client portfolios (76%) and believe the set-up is more suitable to clients.

Other than the popular option of selecting managed accounts provided by the planner’s own dealer group, planners and dealer groups frequently use external MDA providers. 

The survey shows third party MDA providers are preferred largely for being less risky for the practice (57%) and with a lower regulatory burden (51%).

Other key drivers for the outsourcing/insourcing decision are the reduced need to be involved in selecting investments (50%), lower compliance requirements (45%) and the notion the strategy is more suitable for the client (44%).

Looking forward, planners and clients alike will be increasingly spoiled for choice, with technological advances offering previously unprecedented low cost access to the best investment managers and bespoke portfolio construction tools.

Ultimately, planners and clients will determine what the most appropriate structure should be — and how much they are willing to pay for what hopefully is an enhanced value proposition.

Important Information

The views expressed in this material are the views of the Australian SPDR ETF team through the period ended March 31, 2019 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. The February 2019 Managed Accounts Survey conducted by Investment Trends. This report is based on a detailed quantitative online survey conducted between 3 December 2018 and 1 February 2019. The survey included over 760 financial planners, including RG146 compliant accountants, and dealer  group managers who personally provide advice in Australia.