Separately Managed Accounts (SMAs) - typically offered through a ‘Managed Investment Scheme’ – are an evolution of unit trust managed funds and ’fund of funds’ that enable retail investors to own the underlying assets or stocks in a portfolio. Amongst many other benefits and features, SMAs greatly increase transparency and tax efficiency for the investor.
SMAs have been in Australia for some time, since about the late 1990s. While everybody thought they would grow rapidly and go mainstream, this did not happen straightaway. Looking back, there were a number of reasons SMAs didn’t take off initially. Technology and support was lagging, market conditions were unhelpful both before and after the GFC and high net worth (HNW) clients – arguably one of the key segments for SMAs – were utilising SMSFs as a tax advantaged vehicle to invest.
Fast forward a decade or so, and now there’s much greater support for SMAs from both financial planners and dealer groups. They see SMAs as a way to get closer to their clients by providing a more targeted and efficient investment service with greater transparency. At a business level, an opportunity exists to shift the power from asset managers to themselves. In a recent 75 page report in the Australian Managed Account market[1], Morgan Stanley predicts the market will hit funds under advice of $60 billion by 2020, compared with an estimated $28 billion as of last year.
Clearly, SMAs are win-win not just for both financial planners and clients but for all parties involved. Here are the top 3 advantages of Separately Managed Accounts:
1. For financial planners, Separately Managed Accounts offer an opportunity to maximise their revenues and optimise the equity value of their practices by moving up the wealth value chain.
This can be achieved by charging an investment manager or model manager fee, creating an income stream that is potentially more valuable to third parties, improving the back office and create efficiencies that improve profitability, and capturing more of the client’s assets to manage.
It’s fair to say that dealer groups and licensees also see that SMAs can create a more robust advice and compliance framework for their authorised representatives to provide financial product and investment advice. In our experience, it starts with the creation of an investment committee made up of credible and experienced members, from within and outside of the organisation, to oversee and monitor the design and management of investment portfolios.
2. Separately Managed Accounts can also deliver much better outcomes for the client while making the financial planners back office a lot more efficient and effective.
Through the use of innovative technologies and platforms, the whole process of delivering advice and making changes to client portfolios is streamlined. Once a client’s portfolio is invested into an SMA, managing the portfolio becomes ‘real time’ as client portfolios can be “discretionarily” managed without the need to issue a Statement of Advice (or Record of Advice) for changes to the portfolio, when these are within agreed parameters and benchmarks stipulated and explained to the client in the initial piece of advice.
3. Financial planners servicing HNW clients see a natural appeal for SMAs.
HNW clients are more likely to appreciate or demand beneficial ownership, greater transparency as well tax planning benefits across the investments they hold. At the other end of the spectrum, while it’s true that clients with very low investment balances will likely be served by robo-advice offerings over the longer term, it’s also true that the next generation of younger clients are going to demand a lot more transparency and self-control of their investments. And as their investment balances increase, they too may see the merits of SMAs.
The Morgan Stanley report notes how the more mature SMSF segment is turning into a ‘tailwind’ for the growth in SMAs. SMSF investors also demand the benefits of SMAs – professional management with transparency, beneficial ownership and less tax leakage – particularly as their investment balances grow beyond what they once managed on a ‘DIY’ basis.
We’ve assisted a number of firms to introduce managed accounts and SMAs to their client offerings. Their clients are experiencing better service and cost outcomes. Our clients are increasing their revenues, profitability, and capital value. We’re helping them to build more sustainable businesses.
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References:
1. Australia Financials: Managed Accounts – Evolution or Revolution?
