Managed accounts – are we there yet?
Managed accounts are complex – the term can refer to SMAs, IMAs, MDAs and managed portfolios. We have seen SMAs of stocks, SMAs of ETFs and even SMAs of other SMAs. No wonder, then, that we are often asked to explain managed accounts to clients – something we hope to do in this week’s Trialogue.
Let’s start with the basics: managed accounts (sometimes called managed portfolios) are typically grouped into two core offerings – Individually Managed Accounts (IMAs) and Separately Managed Accounts (SMAs). IMAs are created bespoke for each client (and therefore require intensive effort from portfolio managers), whereas all investors in a particular SMA start with the same investment strategy (which can subsequently be personalised with the help of technology, for example to exclude tobacco stocks).
Managed Discretionary Accounts (MDAs) are a completely different beast altogether but the term is often misused. MDAs are not a product at all, rather an advice arrangement where the adviser is given permission to make investment decisions (within certain parameters) without seeking the client’s approval. (Not surprisingly ASIC have taken a dim view of MDAs in recent times.)
Enough with the definitions already.
A raft of adviser surveys has consistently identified pent-up demand for managed accounts for the last ten years. So you might be forgiven for thinking there is a lot of money in them already. Unfortunately, that isn’t the case. Advisers have been well ahead of platforms on this one, and although there was clear demand for a proper, full-functioning managed account solution, it has taken a while for the platforms to develop and deliver the capability.
11 years after the first launch, we have SMAs available on most major platforms (and even some minor ones) as shown in today’s chart.
This week we look at two of the opportunities that haven’t been fully pursued thus far.
Fund managers
Fund managers have been hurting in recent years as the rise of direct equity use has reduced their opportunity set (SMSFs’ preference for equities being a prime factor). Managed accounts give these managers an opportunity to re-engage this segment with a solution that provides professional investment management, a more tangible direct relationship with the underlying assets and some degree of control – perhaps the perfect halfway house.
However, fundies have on the whole been reluctant to join the managed account party – mostly because the structure requires them to publish their portfolio on a daily basis. This is uncomfortable grounds for portfolio managers and elicits fears of front-running and portfolio replication. In our view, and in our experience, these fears are largely unfounded.
Nevertheless, a host of fund managers have portfolios on the major SMA platforms in strategies that replicate well-known flagship funds. But they’re not raising much in the way of assets. The problem – we think – is that investors in SMAs (remember they are generally high net worth types) don’t want the same old flagship strategies they used to buy through a fund. They don’t want a generic monthly fact sheet on Day 10 either. Success in SMAs is going to require two things:
- an investment strategy that meets the needs of HNW investors; and
- a service model that directly targets the needs of those same investors.
Adopting managed portfolios seems to fit perfectly with the transformation already occurring inside broking businesses as they shift from being commission-based stock sellers to portfolio advisers.
So, are we there yet? If not quite there, we are pretty close. The demand for managed accounts in all their guises is such that when the right combination of investment strategies, service models and technology becomes widely available there will be opportunity enough for all.
The next Trialogue will look at how dealer groups and advisers are using managed account and other structures to vertically integrate into asset management.