Understanding of the benefits of managed accounts can help navigate and protect your clients through periods of market volatility.

Australia’s burgeoning managed accounts industry has transformed the ease and efficiency with which advisers can both run a business and best serve their clients. This has been particularly evident during the bouts of market volatility that have impacted investors over the past three years, since the Covid-19 pandemic first upset world markets in March 2020.

Despite this volatility, the managed accounts landscape has continued to evolve and grow. In the six months to 31 December 2022, managed accounts reached another new peak, with funds under management registering a high of $144.5 billion, an increase of nearly 10 percent on December 2021^[1].

This funds under management figure equates to inflows in excess of $10 billion over the last six months of 2022. This, according to the Institute of Managed Account Professionals, demonstrates the important role managed accounts hold as a core service for financial advisers and their clients^[2]. This is borne out by the annual managed accounts report from Investment Trends^[3] that surveyed 632 advisers and found that 56 percent use managed accounts today, a significant increase from 17 percent a decade ago.

There’s no doubt that managed accounts are gaining in popularity and for good reason. If you want to read more about managed accounts and how they work, this earlier article provides an overview.

Market driven evolution

The market-driven evolution of managed accounts has revolutionised the financial advisory landscape, offering a powerful combination of business efficiencies, lower fees, and transparent investment outcomes. This is a transformative change, one which highlights the potential to generate better outcomes for both financial advisers and their clients over time. There are several reasons behind this paradigm shift.

In the first instance, managed accounts introduce significant business efficiencies for financial advisers. Traditional investment management often involves manual processes, paperwork and time-consuming administrative tasks. With managed accounts, these processes are streamlined through automation and technology. As researcher Investment Trends found, managed accounts can deliver real time savings to advisory practices, with advisers saving an average of 15.7 hours per week^[4].

By leveraging digital platforms and robust portfolio management systems, advisers can efficiently create, manage and rebalance portfolios on behalf of their clients. This automation frees up valuable time for advisers to focus on more strategic aspects of their business, such as client relationship building, client education and providing personalised financial advice.

Managed accounts also enable financial advisers to scale their business effectively. With more traditional approaches to financial advice, servicing a growing number of clients can be challenging due to the labour-intensive and compliance heavy nature of the process.

Managed accounts, however, offer the ability to handle a larger client base without compromising the quality of service. The streamlined processes, combined with automation, allow advisers to efficiently manage a larger number of clients. This means advisers can expand their business and increase their revenue potential.

Importantly, managed accounts provide transparent investment outcomes, important for both financial advisers and their clients. Traditional investment management often lacks transparency; clients often have limited visibility into the underlying investments and trading activities. For example, most clients – unless they have a self-managed superannuation fund – are unlikely to know what investments are held by their super fund, despite it being, in most cases, a significant component of their retirement savings.

This concern is ably addressed by managed accounts, through the comprehensive reporting and transparency provided. Clients can access real-time information about portfolio holdings, performance and transactions. This transparency builds trust between advisers and clients because clients can clearly understand how their investments are being managed and track progress towards their financial goals. Trust is an essential component of long-term business relationships.

Transparency of managed accounts also enables advisers to have more meaningful conversations with their clients. By having access to detailed portfolio information, advisers can provide personalised advice tailored to each client’s circumstances and in many cases, client values. The increased propensity for investors to be cognisant of environmental, social and governance factors has led to many wanting to specially include or exclude specific funds, industries or stocks from their portfolio.

A high level of customisation also enhances the overall client experience and fosters stronger adviser-client relationships. Advisers are supported and well informed with respect to client conversations about risk management, tax implications and investment strategies. In turn, this can lead to better investment decisions and improved client outcomes.

Comprehensive reporting and transparency mean that managed accounts provide enhanced oversight of a consolidated portfolio. This, combined with the enhanced functionality of managed accounts, means advisers – and their clients – are better positioned when it comes to periods of market volatility.

Managed accounts and volatility

Consider the recent market volatility first triggered by the collapse of Silicon Valley Bank in March. Managed account providers with multi-manager options that each tap into upwards of 75 global asset managers could tilt in and out of markets at different points of time to provide active management without the need for a planner to provide a statement of advice to clients when underlying funds are swapped. This provides advisers not just with best-of-breed investment prowess in a period when it’s most needed, but also with the ability to concentrate on providing counsel to clients whose nerves may be rattled by market turbulence.

Managed accounts provide valuable tools and features that can help financial advisers and investors weather market volatility more effectively. Managed accounts offer several advantages in this regard.

Diversification and risk management

Managed accounts typically employ a diversified investment approach, spreading investments across different asset classes, sectors, and geographies. This diversification helps reduce concentration risk and provides a buffer against market volatility.

In fact, well-constructed managed accounts can provide several additional layers of diversification in their asset mix to provide a welcome cushion to clients in down markets and access to the best investment ideas throughout the cycle. This could include passive exchange-traded funds which work to achieve both cost and benchmark-tracking targets, or a factor-based portfolio of select direct equities that is rebalanced on a semi-regular basis, in addition to active funds.

By spreading investments, managed accounts can potentially mitigate the impact of a downturn in a specific asset class or market segment. Additionally, professional portfolio managers monitor and adjust the allocations within managed accounts to align with changing market conditions and risk profiles, helping to manage risk and adapt to market volatility.

Active portfolio management

Active portfolio management helps ensure that portfolios are aligned with clients’ goals and risk tolerance, increasing the potential for better outcomes in volatile market environments. Managed accounts often employ active portfolio management strategies, which involve ongoing monitoring and adjustments to portfolios based on market conditions.

Advisers, of their own volition, can also use managed account infrastructure to alter portfolios across an entire client book in a single step. This enables financial advisers to respond swiftly to market volatility by making necessary changes to asset allocations, to rebalance portfolios and take advantage of potential opportunities that arise during periods of volatility.

In periods of heightened volatility, this capability ensures the holdings of each client can be adjusted in a measured way and appropriate timeframe to address their personal objectives. The keys to this process include the enhanced functionality of managed accounts together with the capability to transfer assets in specie without triggering capital gains tax.

Transparent and timely communication

Managed accounts provide transparent and timely communication to both financial advisers and investors. During times of market volatility, clear communication becomes crucial to assuage investor concerns and maintain confidence.

Transparency gives clients the ability to look-through to their holdings. This is an important feature that gives managed accounts a significant advantage over more costly legacy platforms because it provides investors with a greater sense of control.

Managed account platforms typically offer regular reporting, such as trade notes that explain the logic underpinning each transaction; such reporting can provide clients with confidence that their capital is being managed in the most professional manner. Other reporting often includes updates on portfolio performance and holdings, to keep investors apprised of the most up-to-date information.

Financial advisers can leverage this transparency to communicate effectively with their clients and use it to explain market conditions, the rationale behind investment decisions and clarify the strategies they’re implementing to navigate or mitigate volatility.

This communication helps foster trust and understanding and allows investors to stay focused on their long-term goals, rather than being fearful of short-term market fluctuations and potentially making rash decisions based on loss aversion.

Customisation and flexibility

Managed accounts offer a high degree of customisation and flexibility, which allows financial advisers to tailor investment strategies to meet their clients’ specific needs, objects and risk tolerance. During market volatility, different investors may have varying risk appetites and objectives – and those might differ from the ‘good times’ in the market.

Managed accounts can be adjusted to reflect individual preferences and ensure portfolios are aligned with clients’ comfort levels and long-term goals. This customisation and flexibility enable financial advisers to make portfolio adjustments as required, thereby reducing the likelihood of knee-jerk reactions to market volatility.

While managed accounts are structured so that the individual investor has beneficial ownership of the assets in the account, the management of the account can be outsourced to the financial adviser. This means the adviser can make instant changes to their client’s investments without having to prepare a statement of advice and attain the client’s consent.

This process can delay portfolio changes by days or even weeks, not ideal during periods when nimble trading will be advantageous to the client. Being able to respond so quickly means the adviser can flexibly update each client’s portfolio – individually or as a batch – to protect the portfolio or take advantage of opportunities that arise from volatile markets.

Once you add in the capacity of advisers to maximise a client’s tax position by using franking credits and the refund of excess credits, the case for using managed accounts as the primary vehicle for portfolios becomes even stronger.

Emphasis on long-term investing

Managed accounts typically have a long-term investment horizon and focus on achieving clients’ objectives over time. This emphasis on long-term investing helps investors weather market volatility by shifting the focus away from short-term fluctuations.

Financial advisers can educate their clients about the importance of staying invested and maintaining a disciplined approach during market downturns. Managed accounts support this long-term perspective by providing investors with a comprehensive view of their investment journey, demonstrating that volatility is a normal part of the market cycle and that maintaining a well-diversified, actively managed portfolio can lead to better outcomes over time.

There is good reason that Australia’s managed account industry has grown so significantly over the last few years. It has matured into an investment solution that allows advisers to deliver a transparent and cost-effective service to their clients, without compromising the quality of investments on offer or the returns that are generated.

This market-driven evolution has revolutionised the financial advice industry in several fundamental ways: by offering a powerful combination of business efficiencies, lower fees, flexibility and transparent investment outcomes. These factors work together to generate better outcomes for both financial advisers and their clients over time.

The transparency of managed accounts provides clients with a clear understanding of their investments, fosters trust and facilitates personalised advice. Importantly, managed accounts equip financial advisers and investors with valuable tools to effectively navigate market volatility. By leveraging the attributes and advantages of managed accounts, financial advisers can guide their clients through challenging market environments, instill confidence, and foster a disciplined investment approach that leads to better long-term outcomes.

In volatile markets, this enables advisers to manage risks quickly on behalf of clients to alleviate their anxieties and protect their capital. But it is equally advantageous in more steady markets as it gives advisers the critical tools that are necessary to capitalise on opportunities, while also running their own business in the most efficient manner possible.

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Notes:
[1] https://imap.asn.au/publications/perspectives/114-perspectives-autumn-2023/1117-imap-fumcensus-dec-2022.html
[2] Ibid.
[3] SPDR ETFS/Investment Trends Managed Accounts Report 2023
[4] Ibid.

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