Since 2004, when ASIC promulgated the Managed Discretionary Accounts (MDA) Class Order, managed accounts were set to be the next big thing.
Over the past three or four years that promise has started to come to fruition. Approximately $60 billion is now invested in various forms of separately managed accounts (SMAs) and MDAs. These two forms of managed accounts have developed in tandem and represent differing perspectives on the benefits which managed accounts offer, and who will be best placed to take advantage of those benefits.
What are SMAs and MDAs?
Think of managed accounts as ‘Implemented Advice’ – the service an investor client would receive from an adviser if they were the adviser’s only client, and the adviser had the skills of an experienced investment manager across all asset classes.
SMAs generally have a legal structure of registered managed investment schemes. They have been developed by the platform industry as a way of assisting advice firms to deliver the promise of implemented advice. They offer the benefit that the platform takes charge of technology and operations, and often provides a menu of investment managers, just like the traditional managed fund menu. But they suffer from the disadvantage that they are platform-specific and are fundamentally a financial product.
MDAs are set up under their own set of regulations. They are much more commonly provided directly by advisory firms. There are over 200 AFSLs with MDA Provider authorisations. But the issue is that the MDA Provider is responsible for providing or outsourcing all facets of the service from administration and operations to investment management.
Growth in managed accounts of both types has been running at around 40% per year. However, a number of commentators are questioning whether this can continue in a post-Royal-Commission world.
Four drivers of growth in SMAs and MDAs
Growth in SMAs and MDAs has been driven by several factors, including:
- An attempt to achieve greater practice efficiency among advisers.
- A desire by advisers to deliver better, more precise client outcomes.
- Technology developments that have enabled the systematic, model-based management of many portfolios.
- A strategic trend for advice businesses to move towards wealth management, with different pricing models.
If the last of these clashes with regulatory change, will the other three drivers be derailed?
All forms of managed accounts are subject to the existing FOFA regulations relating to conflicted remuneration, just like any other financial product. Indeed, as mentioned above, SMAs are generally registered managed investment schemes and are subject to identical restrictions to those which apply to unit trusts.
How might a tighter regulatory regime impact the key drivers of growth described above?
1. Practice efficiency
Whether an advice business (AFSL holder) obtains revenue from their managed account service or not, the efficiency gains are substantial. Advisers will seek improvement in their office efficiency, and, if anything, this drive will accelerate as advice firms look to control costs more firmly than in the past.
2. Better client outcomes
Managed account structures, particularly multi-asset class models, recognise that client outcomes will be improved in several ways:
- Efficient implementation of tactical changes.
- Client portfolios receive continuous review, rather than annual ad hoc review. This makes advice fees easier to validate.
- Use of listed investments that was previously seen as impractical by many advisers. Generally, this has meant a lower cost of investment.
- Establishment of central investment teams, with an increase in the level of experience and skill applied to portfolios.
- Other cost reductions, particularly in fund manager MERs and often platform costs. The benefit of this flows directly to the client.
Taken in aggregate, these factors lead to better client investment outcomes. None of these issues is likely to be reduced in their impact by regulatory change.
3. Technology advancements
One of the impediments to the adoption of managed accounts was the inability to implement them on major platforms. Every one of the large platforms is now well advanced in implementing this capability and a number of fintechs are offering implementation which makes it feasible to manage many portfolios concurrently. Again, no likely regulatory change will cause these developments to be withdrawn.
4. Charging for portfolio management services
The development of more rigorous portfolio management capability either with internal investment capability or through the use of external consultants or directly contracted investment managers, comes at a cost. Advice groups either absorb this cost or legitimately levy a portfolio management fee on clients to cover it.
For the groups who absorb it as a cost of achieving the benefits outlined above, any regulation change will likely be a matter of indifference. For groups that recover these costs, there are well established client consent processes they can apply.
So, without wishing to seem like a Pollyanna, we don’t think there will be a material negative impact on the trend to migrate significant existing advised assets into managed account structures.
Toby Potter is Chair of IMAP (the Institute of Managed Account Professionals), an organisation whose mission is education, information and representation of managed account professionals.