Q: What is the most important challenge confronting financial planners when discussing managed accounts with their clients?
A: Being able to deliver the same level of comparability that they can provide with respect to managed funds.
Managed accounts in their various guises have been confirmed as the fastest-growing segment of the financial services industry and something which has helped drive the success of platform providers such as netwealth and HUB24.
The recent 2018 NAB/Investment Trends Managed Accounts Report, based on a survey of 841 financial advisers, underlined the level of interest in managed accounts, revealing that in the 12 months to May, the proportion of financial advisers who recommended managed accounts or intended to use managed accounts rose from 46 per cent to 64 per cent.
Commenting on the research findings, Investments Trends research director, Recep Peker said the adoption of managed accounts by financial planners had continued its steady rise over the last year, with 30 per cent now using these solutions for client investments.
“The 2018 results reveal a marked surge in interest in using managed accounts, with advisers recognising considerable benefits for clients, as well as the efficiency benefits in implementing advice recommendations,” he said.
What the Investment Trends research did not show, however, was the reality that managed accounts are not as easily comparable as managed funds, something which FE head of data in Australia, Stuart Alsop, said was owed to the absence of a standardised approach.
FE provided the data underpinning the recent Institute of Managed Accounts Professionals (IMAP) awards, and Alsop said the company was now moving to institute what is proposed to become a standardised approach for the industry in Australia.
He said FE had developed a white paper proposing a standard for the disclosure of managed account performance via the provision of standard file formats for the industry in much the same way as applies to managed funds.
“FE already collects and disseminates managed accounts in multiple jurisdictions globally,” Alsop said. “Based on our experience we believe that the best way to support managed account growth is to ensure that the products are presented in a clear and comparable manner, where possible reusing existing reporting approaches and frameworks (while mindful of the different legal structures).”
Alsop said FE had pursued development of the independent ratings methodology because it believed in connecting SMA strategies available in the market through to the financial adviser community.
“We believe increasing the transparency in the industry will allow meaningful comparisons to be made by advisers being better informed,” he said.
The FE white paper notes that when communicating and reporting on managed accounts there are a number of differences to the methodology which applies to managed funds.
Specifically, the performance of managed accounts can differ for each investor based on a number of factors, such as:
- Date they invested into the portfolio;
- Difference in fees and other admin costs;
- Platform charges/transaction costs;
- Platform transaction times;
- Taxation and franking credits;
- Trading decisions made by the platform/RE; and
- Voting decisions.
The white paper said that, for these reasons it was not practical to show all the performance variants across all platforms and that instead it was more practical for a synthetic performance to be used.
“This standardises one version of the portfolio for comparison,” it said. “The primary objective of the approach is to construct a standard, objective and comparable synthetic performance model of the managed accounts universe.”
The importance of comparability was also made clear by recent research undertaken by Money Management to determine who was using managed accounts and why.
What that research revealed was that around 58 per cent of advisers were directing client funds towards individually managed accounts (IMAs) with an even higher percentage directing funds towards separately managed accounts (SMAs), albeit that the majority of advisers were keeping allocations below 30 per cent.
The Money Management findings also showed that planners were heavily reliant on external research in assessing the suitability of SMAs and that there were distinct differences in allocations depending upon whether they were using bespoke in-house research or bespoke external research.
It showed that those planners using external research were more likely to commit higher allocations than those using in-house research.
FE is the parent company of Money Management.