Managed Accounts hit their stride

Why are advisers embracing Managed Accounts investment vehicles for their clients?
Enabled by increasingly sophisticated technology, Managed Accounts are one of the growth stories of the 2000s. This article, proudly sponsored by Russell Investments, examines Managed Accounts – what they are, how they work and, importantly, how they can benefit your clients and your business.
Like many an innovation, there was more talk than action when Managed Accounts first came onto the scene in Australia. Like investment platforms in the late 1980s and 1990s, it was a slow burn until innovation combined with education to showcase exactly how these new administrative platforms could streamline your business and benefit your clients.
Broadly speaking, Managed Accounts are investment accounts that are managed by a financial adviser or portfolio manager on behalf of the investor. In contrast to traditional investments such as managed funds or ETFs, which pool investors’ money to invest in a diversified portfolio of securities, A Managed Accounts is an individual investment account tailored to each investor’s specific needs and objectives.
The Institute of Managed Account Professionals (IMAP) has tracked the funds under management (FUM) held by Managed Accounts since 2015 and publishes an annual census. The most recent data available is for the period ending 30 June 2022 (figure one) and shows an increase in FUM to reach a new high of $135.8 billion, up 22 percent year on year.
A 2022 Investment Trends report[1] that surveyed over 650 Australian financial advisers observed that 53 percent of advisers now use Managed Accounts, compared to just 16 percent a decade ago. Of those advisers using Managed Accounts, they are recommending them for 60 percent of their clients, compared to 44 per cent in 2021 and 32 per cent in 2016. Further, 52 percent of advisers using Managed Accounts direct more than 80 percent of a typical client portfolio into it.
What is a Managed Account?
Managed accounts are an investment vehicle that allows investors to delegate the management of their portfolios to another, usually their financial adviser. Managed Accounts are delivered through two main structures: Separately Managed Accounts (SMA) and Managed Discretionary Accounts (MDA).
While Individually Managed Accounts (IMA) are still used by some, SMAs and MDAs are more commonly used by financial advisers, hence the focus of this article is on these structures.
1. Separately Managed Accounts
An SMA is a financial product, a registered managed investment scheme (MIS) that enables an investor to access one or more professionally constructed and managed investment portfolios. These portfolios may consist of global and domestic listed securities (such as shares, ETFs or LICs), unlisted managed funds and cash. In each case, the beneficial ownership is retained by the investor or, in the case of an SMSF, the trustee. An SMA is generally accessed via an eligible platform.
SMAs are generally suited to investors who want access to a direct investment portfolio but who don’t have the time or expertise to select, manage and monitor their portfolio. Instead, SMA investors can select portfolios managed by professional managers. Each investor gets the same portfolio based on a master portfolio compiled by the investment manager; the manager determines stock selection and weighting. The value of each investor’s portfolio will depend on the price of the underlying securities on the day they invested.
Because it’s a registered MIS, each SMA must have a Responsible Entity with a duty to make sure the scheme’s investment manager complies with its mandate. The investment manager is responsible for the investment strategy, trading, administration and meeting reporting obligations.
Some SMA providers offer investors options, such as being able to filter in or out specific stocks or asset classes. This can be useful where investors don’t want to double up on other investments or wish to screen out investments that don’t align with their values. Some SMAs enable investors to select the tax treatment of portfolio sales and purchases; for example, enabling the investor to minimise or maximise capital gains tax in a specific period.
How do SMAs differ from managed funds?
There are a number of ways in which an SMA differs from a managed fund; depending on a client’s circumstances, these differences may be beneficial to the investor. These differences include:
- In an SMA, investors hold the underlying investments directly and investors don’t inherit any embedded capital gains or losses within the fund; importantly, this means there are no tax consequences for your client as a result of other investors’ transactions.
- An SMA portfolio generally holds a smaller number of securities than managed funds.
- In a unitised managed fund, investors have an interest in the pool of fund assets; the SMA investor has beneficial ownership of the investments held in their account.
- Investors can view the portfolio holdings of their SMA investments, not always possible with a managed fund.
- Investors in an SMA can more easily determine the current value of their investments than those in managed funds.
- More flexible tax management: in a managed fund, all unit holders are treated equally.
2. Managed Discretionary Accounts
An MDA is an agreement-based service, a personal investment account where the investor signs a contractual agreement to give the MDA provider the authority to buy and sell investments on their behalf. Notably, an MDA differs from an SMA because it is an advice service and not a financial product.
The MDA provider is often a financial adviser who manages the MDA as an investment portfolio for their clients. In this scenario, the adviser must have authorisation from ASIC to provide MDA advice and act as an investment manager. Alternatively, advisers can engage the services of a professional MDA investment manager and simply provide the advice.
The assigned authority of the MDA provider means this entity – whether the adviser or an outsourced MDA manager – has the discretion to make investment decisions on behalf of the investor and can buy and sell investments based on the agreed investment program. In other words, the investor gives the MDA provider the authority and discretion to make changes to their portfolio without the need to obtain authority for each change. Any investment decisions the MDA provider makes on behalf of an investor must be consistent with the documented strategy.
How do MDAs differ from managed funds?
- The investor is the sole owner of the underlying investments.
- The investment is portable – the investor has the flexibility to exit the MDA and retain the underlying investments.
How do Managed Accounts Work?
As described above, Managed Accounts work largely by allowing investors to delegate the day-to-day management of investment portfolios to their financial adviser and/or a professional investment manager or MDA provider.
When a client opens a Managed Account, they will work with you to develop an investment strategy tailored to meet their specific needs and objectives. This plan typically includes a target asset allocation, which includes guidelines for selecting securities or investment products.
Given that 61 percent of advisers say that managed accounts provide an effective mechanism for them to align client portfolios with ESG objectives1, these guidelines are an important part of establishing the investment strategy of a Managed Account. A risk management strategy should also form part of the overall plan.
Once this plan has been agreed and established, the relevant party will take responsibility for the day-to-day management of your client’s portfolio. For the duration of the client’s Managed Account, they should receive regular investment and performance reports, as well as updates about fees and expenses.
Managed Accounts can provide your clients with transparency and control, allowing them and you to make informed decisions about their investments and build portfolios that are aligned with their risk tolerance and investment goals.
The benefits of Managed Accounts
Managed Accounts offer investors a number of advantages over traditional investment vehicles, including:
Greater control and transparency
Managed Accounts enable investors to see exactly what securities or investment products are held in their portfolios and how each of those investments are performing over time. Such transparency makes it easier for advisers and investors to make informed decisions and stay on track to meet their financial goals.
Customisation and flexibility
Managed Accounts offer investors a high degree of customisation and flexibility, which enables them to invest in portfolios tailored to their specific needs and objectives. Whether an investor is looking for exposure to a particular asset class or investment strategy, or they are looking for a more diversified portfolio that can help them manage risk and achieve their long-term goals, Managed Accounts offer a range of options to meet their needs.
Professional management
Managed Accounts enable investors to draw on the expertise of professional investment managers with the knowledge, experience and expertise to identify and select investments to meet each client’s objectives.
Tax efficient
Because Managed Accounts are individual accounts, each investor has more control over the timing and amount of capital gains or losses that are realised within their portfolio; this, in turn, enables you to work with your clients to minimise tax liabilities and maximise after-tax returns.
Risk management
Managed Accounts can be an effective tool for managing investment risk because they are tailored to each investor’s specific needs and objectives. The strategy you create in consultation with your client can identify risk parameters and be structured to provide a high degree of diversification across asset classes, sectors and geographic regions.
Some Managed Accounts may provide access to risk management strategies, such as stop-loss orders or portfolio hedging options to help protect against downside risk and preserve capital in volatile market conditions.
However, wherever there are benefits, there are also downsides. Some pertinent to Managed Accounts include:
- Investors pay fees for administration and investment management.
- Depending on the Managed Account provider, your client may not be able to access all investment options they desire.
- Because your client’s assets aren’t pooled with those of other investors like they are in a managed fund or ETF, the level of diversification available may be reduced.
- While Managed Accounts are more accessible to lower value investors, a smaller investment through a Managed Account may mean the potential benefits do not outweigh the cost.
Why advisers use Managed Accounts
As financial advisers and business owners, you recognise that your time is highly valuable and often in short supply. Managed Accounts are a vehicle that can help you gain leverage over your time, allowing you to build scale, consistency and efficiency into your business.
The Investment Trends Managed Accounts Report 2022 had some interesting findings in relation to adviser use of Managed Accounts. The research found a number of consistent reasons were cited for using Managed Accounts, including:
- Managed Accounts provide access to institutional-grade investment management.
- Managed Accounts provide efficiencies of scale.
- Using Managed Accounts gives advisers more time and scope to focus on educating and communicating with their clients, as well as meeting client goals.
- Using Managed Accounts reduces operational risk.
- Using Managed Accounts enables advisers to significantly reduce their administration workload.
- Managed Accounts provide an effective mechanism for advisers to align client portfolios with ESG objectives.
In combination, these reasons combine to provide advisers considerable time savings. Investment Trends’ research found those advisers using Managed Accounts save an estimated 15.7 hours per week, up from 13 hours in 2020. The majority of this time saving is in investment administration work and selecting or researching investments for client portfolios.
Whether an investor is looking for a more diversified portfolio, a more tax-efficient investment strategy, or access to professional investment management services, Managed Accounts can provide a range of options to meet their needs. It’s not surprising then that Managed Accounts are an increasingly popular investment vehicle for both financial advisers and their clients.
By providing your clients with greater control and transparency, customisation and flexibility, tax efficiency, risk management, as well as professional advice and investment management, Managed Accounts can be a very effective tool to help your clients achieve their financial goals.
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