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Managed accounts: What’s all the fuss about?

12122018_managed accounts

Managed accounts: What’s all the fuss about?

The buzz word in the platform space this year has been managed accounts. Larger financial planning licensee and planner groups are now considering or in the process of setting up their own managed accounts. Some of the platform providers with leading technology benefiting from this trend have been ‘the independents’ such as Netwealth and HUB24, amongst a handful of other providers.

In lieu of this I wanted to explore the rise of managed accounts for our audience that might not be too familiar with what they are and where they come from.

Let’s start with investment platforms

In understanding what a managed account is, it is first critical to appreciate what an investment platform is.

Some would describe an investment platform as the “middle man” of the advice process that sits between a client and a financial planner. Simply speaking, a platform is an online administrative tool that provides ease of investment implementation across a larger pool of investment options whilst also coupling in consolidated reporting and business management functionality (of most value to financial planners and intermediaries).

The original call card for platforms was that they gave investors access to wholesale unlisted managed funds where the direct investment minimum made it difficult for a vast majority of investors to invest in these strategies. Given the custodian structure of a platform, they can essentially aggregate flows and invest collectively larger amounts into these wholesale funds.

Over time the investment menu of platforms has grown beyond unlisted wholesale managed funds to also include retail unlisted managed funds, term deposits, direct equities (local and global), Exchange Traded Funds (ETFs), Exchange Traded Managed Funds (ETMFs) (or active ETFs), Listed Investment Companies (LICs) and Listed Investment Trusts (LITs) plus many more options. For providing such a service, a platform will charge an administration fee in addition to any investment related costs, which is usually tiered as a percentage of the total dollar amount held in custody.

A great deal of the platform providers in the market have traditionally been bank owned products, made available for financial planning clients only. Over time this has evolved, and now competing platforms are being bought to market by independent providers, some also offer these direct to the investor market, including both Self-Managed Super Funds (SMSF) and non-SMSF accounts.

By way of example, Netwealth offer their platform to advisers but also offer their platform service to non-advised investors. Those who trade direct equities would of course be familiar with CommSec, the largest self-directed share trading platform in the market. Investment Trends, a privately-owned financial services research company, reviews and ranks 22 platforms on over 500 key criteria, including cost, functionality, reporting and implementation efficiency, to name a few. According to the 2017 Platform Benchmarking and Competitive Analysis Report, the top five investment platforms in the market were[1]:

  1. Netwealth
  2. HUB24
  3. OneVue
  4. Colonial FirstWrap
  5. Asgard eWrap

Model portfolios and managed accounts

The growth of platforms has also seen the technology develop. One of the major benefits for the adoption of platforms by the intermediary market has been the operational efficiencies one can gain by using them from an advice perspective. This is not just in consolidated, personalised portfolio and tax reporting, but in also having the ability to efficiently implement a model portfolio across multiple investment options, and an even larger number of clients.

A model portfolio really describes the ability to link a number of clients to a predefined investment allocation across multiple asset classes. These models are typically grouped into risk tranches, such as conservative, balanced, growth and high growth, where the asset type and underlying investment allocations tend to change as you shift up the risk profiles within the tranches. As an illustrative example, please see what a model portfolio may look like across a Montgomery focused investment suite:

Montgomery Growth Portfolio
Australian Equities 25%
The Montgomery Fund 25%
Global Equities 45%
Montgomery Global Fund 25%
Montaka Global Fund 20%
Alternatives 15%
Montgomery Alpha Plus Fund 15%
Cash on call 15%

Although model portfolios provide ease from an investment implementation perspective, there are some limitations around rebalancing.

Let’s just say as the manager of the Montgomery Growth Portfolio, I would like to take some off the top from equities and wanted to reduce exposure in The Montgomery Fund and Montgomery Global Fund by 5 per cent respectively and reinvest into the proceeds into alternatives, namely the Montgomery Alpha Plus Fund.

Before doing this under the model portfolio structure, I would need the written permission of each client invested in the Montgomery Growth Portfolio via what is titled a ‘Recommendation of Advice’ consenting to the change.

If I have 50 clients in this model that are based across all different geographies, this could become quite problematic and potentially delay strategic implantation for the end investor. And herein lies the introduction of managed accounts, which is simply a managed investment service where the said model portfolio behaves like a managed fund in that there is an appointed manager and a Responsible Entity (RE) that are able to make wholesale changes across the structure on behalf of their clients.

Types of managed accounts

Managed accounts tend to come into two broader groups, off-the-shelf managed accounts (also/or Separately Managed Accounts, (SMAs) or a private labelled managed account (also/or Individually Managed Accounts, (IMAs).

Off-the-shelf managed accounts are ones that are readily available on the public investment menu of the platforms that are professionally run as multi-asset or single sectors strategies. The managers of such strategies tend to be larger research houses (such as Morningstar), asset consultants (such as Evergreen) or specialist managers (such as us).

A SMA simply describes a managed account where the investors have direct custody over the underlying assets. As an example, it is common to have SMAs in the listed equity space which do bring efficiencies from both a rebalancing and tax perspective (namely a unique capital gains tax (CGT) experience for each investor).

The second group is that of private labelled managed accounts, where a licensee or group will seek what is called an MDA license (of their own or from another specialist provider, such as the platform themselves or another RE) and build their own managed accounts, which can invest in unlisted funds, direct equities (local and global), SMAs, ETFs, ETMFs (or active ETFs), LICs, LITs and many other structures. This tends to be the area of greatest growth in the intermediary space, and also provides scope for such groups to run more bespoke managed accounts tailored even for an individual under an IMA structure.

According to Institute of Managed Account Professionals, this part of the market represented $47 billion in funds under management and that was back in 30 June 2017. As of early this year, this number was closer to $60 billion according to Toby Potter[2] from the Institute of Managed Account Professionals.

In lieu of increased regulation (particularly in the shadow of the Royal Commission), and continued technological developments in platform solutions, Managed Accounts are definitely here to stay in enabling advisers to execute transactions and rebalance portfolios efficiently, and to harness the insights and big-data analytical potential of platform providers to engage more effectively and constructively with their clients.

You can read more about managed accounts here

[1]Source: http://www.shedconnect.com/portfolio-item/netwealth-tops-the-platforms-ratings/

[2]Source: https://cuffelinks.com.au/four-drivers-growth-managed-accounts/


Dean joined Montgomery Investment Management in June 2016. Dean joined the firm from Colonial First State, where he was a Consultant for Retail Sales for 2 years. Prior to this, Dean was also a Relationship Manager with the Commonwealth Bank of Australia, where he spent 5 years working in Retail Banking.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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