For many years, the managed account industry has promised so much, but has failed to really fire, when compared with the incumbent administration solutions provided by the wrap and masterfund platforms. As an industry participant, this has never really made sense to me because managed accounts seem like such a sensible evolution in the provision of administration and asset management services in a world where transparency, portfolio customisation and individual tax management are such important requirements for investors. Especially those high net worth ones.
But alas, the structural reasons why managed accounts have not taken off are plain for all to see. It does not make immediate economic sense for the large wrap providers to cannibalise their dominant market positions by allowing access of these outside run managed account platforms for their planners to use, when those planners are owned by the same entities that own the wrap platforms – they will get there when they have to. But in fairness to the existing wrap administration providers, they do actually provide incredible functionality and integrated services (e.g. risk, non-super, super, pension, direct shares, family pricing, portfolio rebalancing and modelling etc). That is, they work very well for both advisers and their clients.
In addition to the structural reasons, advisers, even when faced with a ‘superior’ solution can be reluctant to change from one administration solution to another because of the costs it enforces on their business, and offering more than one is a headache that not even Panadol can cure, especially for smaller firms.
Lastly, whilst the managed account platforms are right for some clients, they may not be right for all. Consider the following Pros and Cons of the managed account platforms:-
- Beneficial ownership of the underlying investments,
- Portability of portfolios,
- The ability to manage for after tax outcomes,
- Full transparency of underlying holdings where SMA models and direct investments are held,
- Consolidated reporting,
- Can improve work flows for the adviser,
- Removes unit trust administration costs (but is replaced by managed account fees and charges),
- Real time reporting of performance, and
- No more ROAs where the dealer is appointed the investment manager or where using an external model manager.
- Not all corporate actions can be included e.g. institutional placements,
- Diversification challenges e.g. lack of hedge fund access and hard to use derivatives for risk management purposes,
- Execution risk i.e. from delayed implementation,
- Execution costs can be high although the better platforms have the industries lowest cost of execution (e.g. <5 bps after netting),
- An MDA Operator requires the adviser to go back to the client each year for their opt in to continue, while the service offered under a PDS does not require this,
- May not be able to report on legacy products,
- Not great for illiquid assets (although they can be reported on where a valuation can be provided),
- May not have a superannuation version of the managed account platform limiting the appeal to SMSFs only,
- May not be able to integrate life insurance options, and
- Very difficult to pass rebate discounts from investments managers back to the end investors (same for wrap accounts but not so for multi asset unit trusts).
Why is the time right now for managed accounts to have their time in the sun?
We all know the stats. 80% of the advice market is owned by the big four banks, AMP/AXA and IOOF/SFG, leaving just 20% of self licensees to fend for themselves in a FoFA environment where vertical integration is close to impossible to achieve. The ability to clip the ticket across advice, platforms, dealers services and investment management puts these larger groups at a distinct advantage when compared to smaller groups, who may find that achieving similar outcomes very difficult to achieve on a standalone basis.
For small independent licensees, the ability to create a revenue generating funds management capability is simply a bridge too far to cross, given the capital intensity of creating a true multi asset portfolio management capability.
Come in managed accounts…
Managed accounts are enabling many independent groups to become investment managers by leveraging the managed accounts technology, balance sheet and regulatory frameworks, where those advisers can legitimately charge an investment management fee as the implemented model portfolio manager.
As such, for very little start up cost, an adviser who may have been running model portfolios on an existing wrap platform, (with the assistance of a research house or consultant), can now turn that capability into a new line of business with separate pricing and revenue streams by partnering with an appropriate managed account platform.
Importantly, these same vertical integration (and FoFA compliant) benefits can be achieved through the creation of multi asset unit trust structures, which has been achieved by groups like Fitzpatrick through their investment arm Atrium, Infocus, through Alpha, Centrepoint through Ventura and various dealers advised by Select in DMG, Profile, Stonehouse and MGD Wealth. These unit trusts can exist on an advisers existing platform (albeit platforms have onerous requirements to get these trusts listed in general), which therefore requires less change in the advisers practice, however, many of the Pros listed above cannot be achieved in through this structure.
But if an adviser is to go down the route of becoming an investment manager, enabled by a managed account provider, it may require a rethinking of how advice is charged for. Traditionally, advisers have charged an asset based fee to cover all services (outside of risk), essentially creating a conflict between wealth invested and actual advice needs. For example, a recontribution strategy should be priced for the time it takes to deliver and implement that advice, plus a risk premium to cover for PI, with investment management charged separately. There should be no link between the two, although this has been the traditional model, and will be the most challenging aspect to deal with for any dealer wishing to become a legitimate investment manager, as an adjunct to their advice proposition. In today’s markets, consumers want to understand what they are paying for and what they are getting for those fees.
The point of all this is to highlight that a change in one aspect of a business model will have an impact on another, hence why any change should be considered and planned for carefully.
Additionally, the large platforms are backed by companies with significant balance sheets, which allows them to continually reinvest – this advantage is not to be understated by any adviser who may be looking to make the change, from a business risk point of view.
Welcome to the Managed Accounts Arms Race
Given the independent market is small (and getting smaller), and given the incentives provided to move to the ‘dealer as the investment manager’ model, it is no wonder that the existing managed account providers have entered an arms race to capture that territory, before it is locked away. This is sales bloodsport!
The combatants in this race include ASX listed Praemium and Hub24 and soon to be listed, and Thorney (also an investor in Hub24) and Perpetual backed OneVue and Managedaccounts.com.au, alongside the private players in Linear (who is part owned by Bendigo Bank) and Mason Stevens. No doubt there will be consolidation in this sector in time to get true economies, but even at low relative funds under management, the listed players are now cash flow positive.
In addition to these hungry entrepreneurial groups, the big providers including BT, through their NextGen project, and Macquarie, are spending up big in order to offer multi asset managed account capabilities. Netwealth may be ready for their launch later this year too.
Blow up risk?
The managed account providers have a lot to lose with any ‘dealer as the investment manager’ that decides to go off the ranch in terms of investment strategy – after all, they are taking the regulatory risk, as the issuer of the dealers PDS when offered as an MIS. I rate this risk as very low, however, because the managed accounts are assisting (and requiring) that the dealers create formal investment charters, performance objectives, asset class ranges, allowable investments and mandate limits. Further, they are generally requiring the services of an experienced consultant to beef up the internal investment resources (which should be a new source of opportunity for smaller consultants – Ibbotson, Philo and Select are very active in this market already). Most importantly, the managed accounts monitor every trade and portfolio change to ensure they are within these limits at the asset, manager and individual security level, which they call ‘models’.
Who wins and who loses in this new world?
Based on the Pros listed above, the winners in this new world may include:
- Direct assets (e.g. cash, TDs, fixed income and Australian equities),
- Listed Investment Companies,
- Stock brokers and online brokers,
- Exchange Traded Funds,
- Fund managers who can deliver their IP in an SMA or IMA format,
- Smaller consultants,
- Any mFund listed managed fund, and
- High alpha and specialist managed funds (where liquid).
The losers may include: –
- Traditional managed funds (e.g. benchmark aware),
- Multi manager portfolios, and
- Wrap accounts (but not in my lifetime).
As always, the future is uncertain, however, it is my view that what was once a trend (and a potential opportunity) is now fast becoming an embedded business model for many self licensed dealer groups, which will assist them in sustaining their own businesses from these new sources of investment management revenue. This can only be a good thing for competition and consumers.
Andrew Fairweather, Founding Partner and Managing Director