Evolution of managed accounts – ifa

After almost 25 years in the market, the benefits of managed accounts are well established.

Once only feasible for advice businesses serving wealthy clients with bespoke portfolios, managed accounts are emerging with new investment options and lower fees, enabling advisers to use the transparent structures with a wider range of clients.

The products improve the efficiency of advice practice management by streamlining the process for implementing portfolio changes and may reduce the requirement for compliance documentation such as records of advice.

For clients, having beneficial ownership of the underlying investments offers greater transparency of portfolio holdings than other managed investment types and may make managed accounts more tax-effective than investments in a pooled unit trust.

But bigger than that, is the intergenerational wealth transfer, which continues to present opportunities for advisers to capture that next generation of clients who will need advice and allow advisers to grow business revenue.

And we know there is a growing demand for high-quality financial advice that is affordable and accessible. The number of unadvised Australians who intend to seek financial advice in the next two years rose to 2.6 million in 2020 from just 1.3 million in 2015, according to Investment Trends[1].

Tailored offerings

Historically, managed accounts have been used by wealthier clients with complex investment and tax management needs, who are looking for bespoke investment solutions through an individual managed account. Now, managed accounts have evolved to a point where they are within reach of all clients.

Advice businesses can use managed accounts to efficiently implement portfolios that showcase their investment expertise when this forms part of their value proposition. Portfolios could be hand-picked by the adviser, selected by the licensee to match an in-house investment philosophy, or managed externally but tailored to a clients individual ethical, social, tax or income preferences.

Wealthy clients have the capacity to pay for tailored investment selections and a managed account that can be highly customised for their objectives. Lower balance clients also benefit from professional portfolio management and visibility of investment holdings but many have been unable to afford to pay for individualised investment services.

Shift in focus

Many financial advisers already outsource research recommendations and model portfolios to investment consultants such as Lonsec, Morningstar and Zenith.

Changes in the advice landscape have seen some advisers move away from providing investment advice as the central tenet of their offering. Only 45 per cent of Australians seeking financial advice were looking for advice on investments, the Australian Securities and Investments Commissions 2019 report Financial advice: What consumers really think found.

Those advisers who do not base their value proposition on their investment expertise find that outsourcing the research function frees them up to spend more time having strategic and goals-based conversations with clients.

However, many advisers continue to implement their client portfolios in-house. Advisers handling their own portfolio implementation receive information from their asset consultant, identify which client portfolios need to be updated, and contact those clients for approvals before executing the changes either one-by-one or in bulk. Changing the portfolio triggers the need for additional advice documentation.

Platform technology and adviser software are continuously improving, increasing the efficiency of reporting and administrative processes, as well as the speed of execution, but they cannot remove the bottlenecks entirely.

It takes time to review and digest an asset consultants recommendations, read client reports, contact clients, and wait for their responses. It also takes time to prepare compliance documentation.

Process improvement

Managed accounts allow advisers to re-engineer the process to remove these bottlenecks.

After the client has invested in a managed account, the investment consultant running the portfolio can rebalance and update to preserve the target risk level and asset allocation without needing to seek consent from the client or prepare additional advice documentation.

This can shrink the execution lead time. It may also reduce the compliance risk of having clients funds committed to what may have become an inappropriate investment.

Using managed accounts run by asset consultants can also save advisers time when engaging with clients as these asset consultants provide detailed commentary on their portfoliosthat can be passed on to clients, without advisers having to prepare reports for themselves.

Professional asset consultants only add or remove investments from their portfolio recommendations for good reason. When they make changes, they expect those to be reflected in client portfolios as soon as possible.

While managed funds are similarly responsive and eliminate the need for additional documentation for portfolio changes, they do not provide the client with beneficial ownership of the underlying assets or as much transparency of investment holdings as managed accounts do.

Total costs

When clients look at the cost of advice, they consider the total amount they are charged including fees for accessing and implementing investments, and the cost of their advisers strategic recommendations.

By improving business efficiency and removing product fees and fees for asset consultant services, clients using the new breed of managed accounts pay less overall for advice. This makes managed accounts a more viable option for lower balance clients who want professional portfolio management, transparency and beneficial ownership of their investments, without an additional layer of fees.

Advice businesses that serve these clients gain greater flexibility in the way they charge for their advice and save time that can be used elsewhere having deeper strategic conversations with clients, working on the business, or expanding to serve more people.

Bryce Quirk is chief distribution officer at Colonial First State.

[1] Investment Trends[1] 2020 Financial Advice Report, which surveyed 4,501 people in July last year.

Evolution of managed accounts

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Evolution of managed accounts - ifa