Guide to Managed Accounts 2019 by FE Money Management

Guide to

Managed Accounts Principal Sponsor

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Efficient portfolio design with BT Panorama. Helping you help your clients with model portfolios, online client consent, periodic re-balancing and integrated RoA with a feed to Iress Xplan.

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BT Funds Management Limited ABN 63 002 916 458 AFSL 233724 is the issuer of Panorama Super, part of Retirement Wrap ABN 39 827 542 991. BT Portfolio Services Ltd ABN 73 095 055 208 AFSL 233715 operates Panorama Investments and administers Panorama Super. Consider the PDS or other disclosure document, available by calling BT on 1300 784 207 or at www.bt.com.au/professional, before deciding whether to acquire or hold the product. You should consider whether the product is appropriate for you.

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Editorial Can managed accounts thrive beyond regulatory scrutiny?

he question confronting the managed accounts sector is whether increased regulatory scrutiny will act as a brake to its recent rapid growth? A combination of circumstances and indeed, technology, have seen managed accounts emerge as one of the fastest-growing segments of the Australian financial services industry. The circumstances have evolved out of the impact of the Future of Financial Advice changes on adviser and dealer group commercial models, while the technology dynamic has been driven in large part by the platforms, particularly the likes of Netwealth and HUB24. But with the rise and rise of managed accounts has also come increased regulatory scrutiny and there will be a good deal of attention directed towards what the Australian Securities and Investments Commission (ASIC) concludes from its sharper focus on the sector over the past 18 months. The priority for ASIC will, of course, be determining who benefits most from utilising managed accounts â&#x20AC;&#x201C; the client or the adviser? However, as Oksana Patron reports in this Guide to Managed Accounts, there are undoubted benefits for advisers, particularly those who like to have a deeper level of engagement with their clients. But whatever the regulator concludes, the rapid growth in the use of managed accounts over the past four years, and the need for the industr y to embrace new commercial models means that the sector is likely to continue to grow. The key for the industry amid the increased regulatory scrutiny will be proving that just because something works well for the adviser does not mean it is bad for the client.

Mike Taylor Managing Editor

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Contents 03

Editorial

Global SMAs 12

Why managed accounts could be aÂ win-win for advisers and clients

Getting the right recipe for managed accounts success

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Contents 20

Managed accounts step up to business challenge

Building the ‘trust equation’ 28

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About the publisher

Launched 32 years ago, Money Management has firmly established itself as the leading source of news and analysis for Australia’s financial services sector. In this time, Money Management has rapidly evolved from a B2B newspaper into a respected provider of accredited education and training, research, professional support and advocacy as well as thought leadership in the financial services space. While it remains the most-read print and online publication by financial planners in Australia and is widely recognised as a leading advocate for this profession, Money Management's growing audience is a diverse one that also includes fund managers, accountants, risk advisers and superannuation fund trustees. Money Management is also the clear publication of choice for finance institutions – both domestic and international – seeking to connect with the high-earning and well-educated professionals working in Australia’s financial services sector. FE fundinfo facilitates better, more efficient investing by connecting fund managers and fund distributors and enabling them to share and act on trusted, insightful information. We provide the data, tools, infrastructure and expertise required to research, distribute, market and invest in funds and model portfolios – maximising efficiencies for asset managers and fund distributors through our unique cloud platform.

ACN 618 558 295 www.financialexpress.net © Copyright FE Money Management Pty Ltd, 2019

FE Money Management Pty Ltd Level 10 4 Martin Place, Sydney, 2000 Managing Director: Mika-John Southworth Tel: 0455 553 775 mika-john.southworth @moneymanagement.com.au Managing Editor/Editorial Director: Mike Taylor Tel: 0438 789 214 mike.taylor@moneymanagement.com.au Associate Editor - Research: Oksana Patron Tel: 0439 137 814 oksana.patron@moneymanagement.com.au News Editor: Jassmyn Goh Tel: 0438 957 266 jassmyn.goh@moneymanagement.com.au Senior Journalist: Laura Dew Tel: 0438 836 560 laura.dew@moneymanagement.com.au Journalist: Chris Dastoor Tel: 0439 076 518 chris.dastoor@moneymanagement.com.au Marketing Manager: Odette de Souza Tel: 0404 439 000 odette.desouza@financialexpress.net ADVERTISING Sales Director: Craig Pecar Tel: 0438 905 121 craig.pecar@moneymanagement.com.au Account Manager: Amy Barnett Tel: 0438 879 685 amy.barnett@financialexpress.net Account Manager: Amelia King Tel: 0407 702 765 amelia.king@financialexpress.net PRODUCTION Graphic Design: Henry Blazhevskyi Subscription enquiries: www.moneymanagement.com.au/ subscriptions Money Management is printed by Bluestar Print, Silverwater NSW. Published fortnightly. All Money Management material is copyright. Reproduction in whole or in part is not allowed without written permission from the editor. © 2019. Supplied images © 2019 iStock by Getty Images. Opinions expressed in Money Management are not necessarily those of Money Management or FE Money Management Pty Ltd.

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Global SMAs

Are SMAs a good solution for everyone? With a wide variety of managed account types available, writes Oksana Patron, a global SMA could be an opportunity for advisers to expand their horizons from traditional options.

eparately managed accounts (SMAs) work best for the specific group of people who enjoy talking about stocks and their investment options. This includes financial planners and practices who like having investment conversations with their customers and clients who are equally enjoying having such an interaction with their planner, asset manager AllianceBernstein (AB) said.

Although SMAs are not perfectly suited to all types of advisers or practices, they can help create extra value for the portfolio for those advisers who have traditionally had a deeper level of engagement with their clients and know they want more than just to see what stocks are in but also wish to know what these stocks can do for their portfolios. Continued on page 8

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Global SMAs Continued from page 7 However, at the same time, according to AB, there was still a large group of financial planners who just want to do a simple asset allocation and who would not require any further conversation around SMAs. According to AB’s managing director of Australia client group, Ben Moore, there was room for both SMAs and unit trusts in investors’ portfolio. However, he said, in the case of global SMAs, some practices which would choose to use an SMA over a unit trust area were attracted to the portfolio transparency offered by this option. “As their clients can see the stocks, we usually find that advisers using an SMA seek greater detail on the companies in the portfolio, most of which are very different from the names in our local market which is dominated by financial services, materials and energy,” Moore said. The AB Concentrated Global Growth SMA had no developed market banks, energy or mining companies as their earnings profiles were too cyclical for this type of investment strategy.

“One of the attractions of our Global SMA is that it has low turnover. This appeals to clients because, as they hold the stocks directly, they incur a trading cost when a change is made to the portfolio,” Moore said. Another factor determining the product’s suitability for particular clients is the minimum investment, which in the case of AB’s Global SMA was $65,000. Moore explained that this reflected the fact that some stocks in global portfolios could have high nominal share values. “You really need a practice that is in the private wealth space and I say that because you’ve got companies like Booking.com, a big travel company with amazing cashflows but it’s $2,000 a stock – we say anything from $65,000 to $100,000 would be ideal to go into this portfolio,” he said. Speaking on the subject of the global SMAs and their absorption among planners, Moore stressed that given the recent changes going on across the Continued on page 10

Chart 1: AB Concentrated Global Growth SMA top holdings

5% 4% 3% 2% 1% 0%

Mastercard

Microsoft

Verisk Analytics

Abbott Laboratories

Zoetis

Nestle

Charles Schwab

ASML

IQVIA

Prudential

Source: Alliance Bernstein

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Global SMAs funds

In the case of global SMAs, some practices which would choose to use an SMA over a unit trust area were attracted to the portfolio transparency offered by this option.

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ng and ng staff

Global SMAs

6% 5%

Continued from page 8 4% financial planning industry, including the fallout the incumbent players were ‘yet to do so’. 3% from the Royal Commission, this was a difficult time “I’m super excited that we are on the fastestfor advisers to embrace new offerings. growing platforms,” Moore said, adding that it was 2% “One thing about advisers today is that they equally important for the clients to be able to use are not waiting and thinking do I need a global the platforms with a right set of functionalities. 1% SMA? They are thinking about the FASEA [the “If advisers are familiar with their [platforms] Financial Adviser Standards and Ethics Authority] technology then it’s great, it works really well. If 0% Verisk Abbott Charles Microsoft Zoetis Nestle ASML Prudential Analytics exams Mastercard and accreditation,” MooreLaboratories said. they areSchwab not familiar with IQVIA it – it seems not to be When it comes to global equities, in many the audience that we are looking for,” Moore said. cases funds were doing their job and there As far as the compatibility between of SMAs were and assets classes was concerned, Moore said: 8% plenty of great global equity managers out there, but at the same time there were a growing “It would be difficult to put fixed income portfoli7% number of advisers who had used local SMAs in os into an SMA, particularly for global/diversified 6% past and had a positive experience and they the bond strategies that typically hold 500+ securiwere ties, have high turnover and use the derivatives 5% now ready to start using global SMAs. Moore noted that Australian investors, in markets actively. 4% general, did not have the option to own direct “A single asset class SMA (global or local 3% equities for a long time and currently there global equities, for example) offers, in our view, imporare tant differentiation, as we have seen tremendous 2% still only four major platforms that enable global SMAs to sit on. growth in multi-asset managed accounts that use 1% AllianceBernstein noted that the newer plata combination of listed vehicles (listed investment 0% forms such as HUB24, Praemium, Netwealth and Consumer companies, exchange traded funds, direct stocks Consumer Communication Real Information Industrials Healthcare Materials Utilities Energy Financials Discretionary Staples Services Estate Technology Mason Stevens all enabled global SMAs whereas and SMA’s) and managed funds.” Chart 2: AB Concentrated Global Growth sector weightings

Information Technology

Healthcare

Industrials

Consumer discretionary

Materials

Consumer staples

Communication

Cash

Financials

Source: Alliance Bernstein

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Global funds

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Strategies

Why managed accounts could be a win-win for advisers and clients Advisers report that managed accounts are win-win. Zac Leman, Head of Managed Accounts at BT, explains.

ith the investment advisory market facing pressure to be more transparent and to provide investment products that are cheaper, and also help facilitate advice practices to more easily meet their compliance requirements, managed accounts are a contemporary solution suited to these precise times.

Market voting with its feet According to the most recent Institute of Managed Accounts Professionals (IMAP) funds under management (FUM) census, as at June 2019 the demand for managed accounts appears to be accelerating. Between 31 December 2018 and 30 June 2019, FUM increased by over $9.2 billion, with total FUM in managed accounts at $71 billion. Net funds inflow for the period were $4.4 billion, a significant increase on the previous period1. The increased interest in managed accounts is also shown by the number of platforms that offer them. In the last ten years this has grown from just three platforms to 16 at present, with 71% of advisers using platforms that offer some form of managed account solution2. Not only are more advisers using managed accounts they are also deepening their usage, with current users tripling their inflows into managed accounts in the last five years alone3.

The potential for win-win The demand and usage of managed accounts is growing because of their potential for a win-win for investors and advisers – while they have traditionally been recommended for the transparency, taxefficiency and portability they give an investor, they may also provide benefits for the adviser or practice implementing a managed accounts solution within their business. Some other potential benefits that managed accounts may bring at the practice level are consistent portfolio outcomes across clients, and aiding compliance, risk management and governance.

The time saving benefits are tangible The time-saving benefits are neither anecdotal nor trivial –in February 2018, Investment Trends asked advisers how much time they were saving across several investment management-related tasks, after implementing a managed accounts solution. The answer came to 12.4 hours a week4. That is more than a week per month, or two months per year in time potentially saved.

Creating time – and time is money Much of the upfront work remains the same when comparing a managed account solution to individually managing a number of client portfolios – while

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BT F ABN admi www is ap

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Strategies Continued from page 12 SOAs, ongoing compliance work and other business activities that support portfolio management are still required, advisers surveyed by Investment Trends said that all of these aspects took less time. It is when we focus on the other functions that are more related to the actual investment, following the implementation of managed accounts, that the substantial time savings emerge. These functions include generating client reports, investment administration work searching for and researching investments, preparing Records of Advice, communicating portfolio changes and following-up clients for consent.

Client engagement – the holy grail of financial advice Lastly, we believe one of the most powerful things to emerge from Investment Trends research is that the benefits of adopting managed accounts are not transitory or shortlived – we can see that the longer an adviser uses managed accounts, the greater is the number of active clients they have holding them. Not only is the industry seeing greater adoption of managed accounts, but deeper adoption. In the first year using managed accounts, a typical adviser will have about 20% of their active clients invested in them: this increases significantly each year, so that after five years, a typical adviser using managed accounts will have about half of all active clients invested in managed accounts. We believe this increase in

the proportion of an adviser’s clients investing in managed accounts is due to the potential benefits offered by managed accounts.

The end result We believe that the end result is a higher proportion of clients being serviced more efficiently, leading to increased client confidence that their portfolio is receiving regular attention, generating higher client satisfaction and engagement. In itself this would be a highly desirable outcome, but a true win-win goes deeper than that. For advisers, implementing managed accounts can lead to a far more effective and transparent way to show adherence to compliance, while also leading to greater practice profitability. But well beyond these considerations, we believe, is that ability of the managed accounts structure to improve an advice practice so as to lead to more professionally – and personally – satisfied advisers. Of course, all investments carry risks, and you should consider the risks associated with managed accounts to assess whether the potential returns justify those risks. Please refer to the relevant Product Disclosure Statement before making any investment decision. Download the full report at bt.com.au/ MAthoughtleadership. Learn more about how BT can help you find a portfolio construction or managed account solution for your business at bt.com.au/portfolioconstruction.

Source: Institute of Managed Account Professionals (IMAP), September 2019. IMAP Milliman Managed Account FUM Census as at 30 June 2019. https://www.imap.asn.au/publications/latest-news page accessed 15/10/19. Source: Investment Trends, 2019. Investment Trends Managed Accounts Report 2019. The report shows the average time savings among 251 planners who recommend managed accounts. 3 Source: State Street Global Advisors, 2019. By the Numbers: Australian Managed Accounts Sector. https://www.spdrs.com.au/doc/16104by-thenumbers-web-av.pdf, page accessed 08/08/19. 4 Source: Investment Trends, 2018. Investment Trends Managed Accounts Report 2018. 1 2

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Strategies

Getting the right recipe for managed accounts success Not all managed accounts are created equal and it is up to advisers to ensure their clients get the right solution for their needs, writes Vanguardâ&#x20AC;&#x2122;s Balaji Gopal.

t seems as though managed accounts have been gaining more and more attention in recent years, and rightly so: this type of investment solution can offer a great combination of flexibility, transparency and convenience that benefits both investors and financial advisers, hence their growing popularity. But not all managed accounts are created equal. Particularly for advisers considering which managed accounts might be right for their clients, itâ&#x20AC;&#x2122;s important to understand the key ingredients for a successful recipe when it comes to creating a managed account solution. Getting that recipe right can make a genuine difference to an investor finding success in meeting their financial goals. Despite their growing popularity over the last few years, managed accounts have been around

since the 1970s, having been developed to accommodate specific (and often tailored) client demands that could not be met by a pooled managed fund. Whilst managed accounts marked their first entry into the Australian market almost two decades ago, hefty investment minimums meant that these structures were typically only available to wealthier investors for many years, leading to relatively modest growth in their broader adoption. However, recent advancements in digital technology have given rise to the modern managed account, now more accessible, scalable and to be able to be offered at lower minimums and relatively lower cost to investors. These more efficient and effective products have led to a surge in the use of Continued on page 16

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Strategies Continued from page 15 managed accounts with mainstream investors and advisers alike. According to figures from the Institute of Managed Account Professionals (IMAP), funds under management in managed accounts stood at $71 billion as at 30 June, 2019, up almost 15% from $62 billion six months prior. Further, data from Sydney-based industry research company Investment Trends found that the proportion of financial advisers recommending managed accounts to clients has doubled in the last five years. So what are managed accounts and why are they experiencing such rapid growth?

Back to basics: Getting the terminology right With the increasing number of advisers considering the use of managed accounts for their clients, it is important to note and understand the differences in legal structures. Managed accounts is simply a general term that refers to a category of products where the underlying securities are owned by the investor, the investment management relies on the intellectual property of an investment manager and is professionally managed. The entity issuing the product is legally responsible for the trading, custody, and account level administration. Separately managed accounts (SMAs) refers to the type of legal structure used i.e. a non-unitised managed investment scheme offered under a product disclosure statement (PDS). An investment is allocated across a ready-made model portfolio designed by the investment manager, which then determines the portfolio allocation of assets. SMAs are cost-efficient, transparent (underlying

securities are held in beneficial ownership) and flexible (offering the ability to conduct in specie transfer holdings in and out of an SMA). If the portfolio is tailored exclusively for a client, then it is called an individually managed account (IMA). Managed discretionary accounts (MDA) is an umbrella term that refers to a contractual relationship between an adviser (who has to be a MDA provider) and client where the adviser has full discretion to build, manage and implement client portfolios. The adviser trades on the clientâ&#x20AC;&#x2122;s behalf using their own models or those of an investment manager, subject to certain agreed guidelines and limits.

Benefits of managed accounts for investors Unlike a managed fund where assets from multiple investors are pooled together, the underlying assets in a managed account are directly owned by the investor. The tax effectiveness of managed accounts is also another potential benefit to investors, where an investor may benefit from the tax advantages of a managed account structure due to beneficial ownership of the underlying assets as opposed to the pooled capital gains or losses in a single managed fund.

Moving from products to portfolios Advisers often make choices between strategies based on a variety of considerations related to their business model and client segments. We have observed a marked shift away from advisers being product centric and towards using managed accounts as an avenue to building holistic, diversified portfolios for their clients. Continued on page 18

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Strategies AN ADVISER’S ALPHA Managed accounts can play a key role in delivering what Vanguard calls Adviser’s Alpha – the potential additional financial benefits an adviser’s clients can reap through a focus on holistic financial advice and behavioural coaching. An adviser shifting their primary focus away from portfolio construction and management and towards personalised client goals can deepen and strengthen their connections with clients, and provide them with stronger outcomes. TOP-DOWN PORTFOLIO CONSTRUCTION AND LOW COSTS By constructing portfolios around broadly-diversified managed investment solutions rather than acting as a stockpicker, advisers can free up time to expand their role as financial guide and teacher. This approach creates an opportunity to help clients understand critical investment concepts and create plans based on their goals. BEHAVIOURAL COACHING Advisers can help clients to ignore market ‘noise’ by explaining how a balanced portfolio can withstand the ups and downs of the market over the long-term, which in turn helps investors recognise the value of staying the course as part of executing a well-designed financial plan. HOLISTIC WEALTH MANAGEMENT The key to an adviser differentiating their practice may be positioning themselves at the centre of clients’ financial lives, taking the time to gain a 360-degree view of their financial relationships and offering their practice as a hub for an array of value-added services. Clients view investing in terms of their life goals and depend on their adviser to be a trustworthy guide on their path toward these goals. DEMONSTRATING VALUE Through demonstrating the ability to act as wealth manager, financial planner and behavioural coach – providing discipline and reason to clients who are often undisciplined and emotional – rather than by efforts to beat the market, advisers can demonstrate significant value in their most powerful areas of expertise. Demonstrating value for advisers will become increasingly important as the compensation structure in Australia evolves from a transaction-based system to a fee-based, asset management framework. However, providing a well-considered investment strategy and asset allocation is as important as an adviser’s investment acumen and ability to deliver better returns than the markets. This can also lead to more referrals and less client attrition. But advisers must do their due diligence in ensuring that managed accounts they might consider for their clients possess the right ingredients for success. By focusing on costs, seamless experience and reliable and consistent investment management expertise, advisers can be on their way to identifying managed account solutions that can be a valuable aid in improving client results. | GUIDE TO MANAGED ACCOUNTS | MONEY MANAGEMENT | 17

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Strategies Continued from page 16 Some advisers have adopted managed accounts as a whole-of-business solution, while others are using a combination of funds and managed accounts via platforms, and others choosing to implement portfolios off-platform entirely. Some believe that managed accounts have helped enhance the client engagement experience and generate more value in relation to their advice process, especially with the more sophisticated clients who want to ‘look under the hood’ to see the individual components of the portfolio and want to be more engaged with reporting and transactions. Managed accounts – especially those based on model portfolio structures – come with ease of access and administration, and users have typically found that the structure has delivered business administration and compliance efficiencies, with the average managed account user estimating that they save more than 12 hours weekly on portfolio management tasks such as administration, portfolio construction and implementation, and compliance. This has freed up time for advisers to focus on their clients’ more complex needs, such as estate planning, as well as providing advisers with more capacity to focus on enhancing their adviser value proposition and growing their business. Depending on the investment manager and responsible entity, most managed accounts offer advisers and their clients the opportunity to access varying exposures of domestic and international equities and fixed income, to suit a range of client goals, risk tolerances and time horizons. Usually delivered through a model portfolio structure, the managed account strategies include strategic or dynamic asset allocation and broad diversification, as well as automatic rebalancing to ensure

the portfolio allocations remain in place over the long-term. Costs, as well as portfolio turnover, are dependent on the underlying strategy and are generally higher for actively managed strategies, versus those being implemented using low cost and low turnover underlying index strategies. We have also seen a growing trend towards advisers adopting and building bespoke and customised managed accounts for their clients. These however may increase compliance and investment burdens on advisers and their businesses, which reduces the benefits of model portfolio structures, and inevitably reduce time spent on important aspects of their businesses. Advisers may be better served to work with professional fund managers and assessing strategies that have truly stood the test of time.

Things to consider when choosing a managed account solution So far, the benefits far outweigh the drawbacks, if any. But as with all financial products, not all managed accounts platforms and providers are created equal, and so it’s imperative that advisers know what ingredients they should be on the lookout to ensure they are selecting managed accounts that can consistently meet their clients’ needs.

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Strategies 1) Goals, strategy then structure Deciding to use managed accounts in a portfolio is part of the implementation step of the portfolio construction process. Advisers should always begin with the client’s goals in mind and consider the investment mix and optimal portfolio structure that will achieve those goals. 2) Strategies backed by reliable and clear investment expertise A key consideration for advisers when selecting the right solution is ensuring that the investment strategies are backed by the investment thinking that is long-term, enduring and provides the highest probability of a client achieving their portfolio objectives and goals. Advisers should consider if the investment manager is known for its investment expertise and if it has a consistent track record over a long period of time. Advisers should assess the model portfolios and establish if the strategies are supported by research-led thinking and whether their philosophy and strategies are suitable for clients. 3) Seamless integration and user experience Thanks to rapid advances in technology, managed accounts have, in recent years, become an accessible investment option via most notable investment platforms, rather than existing as stand-alone niche offerings that weren’t easily consolidated with broader portfolio assets. A key consideration for advisers should be whether the solution integrates into existing technology and databases. The majority of managed account providers now offer advisers real-time visibility of transactions and portfolio composition, in addition to seamless whole of portfolio reporting and tracking. Another key element is the client interface that delivers the ability to provide clients

with a view of their investments in real-time, which ultimately helps advisers assist their clients in understanding portfolio makeup and performance, and how they can factor that into meeting their overall financial goals. 4) Low cost The discussion around the an optimal strategy often focuses on an optimal approach for investors to maximise their returns, however these discussions often distract from the one factor that transcends investment style or preference – cost. The overall cost of a managed account solution should always be a key consideration, particularly as the market continues to be flooded with newer, more innovative products. A fee structure for managed accounts can include costs such as an administration fee, a management fee, the underlying Management Expense Ratio (MER) if investing in funds or exchange traded funds (ETFs), a performance fee (for some actively managed strategies), and brokerage. Other providers may add transaction, custody and account maintenance fees. These costs vary widely across providers and should be checked closely as fees could eliminate the other advantages of a managed account. All other factors being equal, lower costs should translate into higher net returns and better performance for many investment portfolios. The less that is paid in fees, the more of what the portfolio earns stays in the client’s portfolio, where it belongs. Ultimately, whether an adviser chooses to use a model portfolio for a client or to further customise a managed account, the key is to stay diversified, and keep costs low. Balaji Gopal is head of product strategy at Vanguard Australia.

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Strategies

Managed Accounts step up to business challenge Managed Accounts are being recognised by practice principals as a key component of modernising their business to streamline the investment function of their service proposition so they can focus on providing strategic long-term advice.

n the whitepaper Redesigning a practice: A case study, Forte Asset Solutions Principal, Stephen Prendeville, conducted a focussed case study on one practice who introduced Managed Accounts to their business and documented the business transformation over three years. The practice (known as â&#x20AC;&#x2DC;Alphaâ&#x20AC;&#x2122;) was established in 2001 within a large national licensee, but then moved to a smaller licensee in 2013. In the 2015/2016 financial year, Alpha had $82 million in funds under management (FUM) across 176 clients, with recurring revenue of $565,000 based on an average fee of 72 basis points per client. The practice was experiencing increasing costs in compliance and personal indemnity insurance, which was leading to static profitability. With the help of an external consultant, a three-year plan was devised. Not only did the practice seek to deepen its client value proposition, it also had to make some significant changes to the business including the repositioning of its client value proposition, segmenting its client

base, moving to fixed fees and outsourcing asset management. In the first year, the practice ran a tender for aÂ managed Account provider and outsourced asset management. The tender and selection process took 4-6 months and was important to ensure the practice could demonstrate due fiduciary care was taken and that the solution was appropriate for their client needs. Further, not all Managed Account solutions have the same functionality, so it was important to understand the differences between the range of solutions available. The migration process to Managed Accounts was primarily completed in 18 months, with 76% of the clients migrated, representing 89% of FUM. Over the three-year period, the business FUM had grown by 30% and gross revenue by 85%. The business had increased its corporate governance, reduced key person risk, enhanced client retention and attraction, reduced market risk to revenue and was now well-positioned for future growth.

This document has been issued by HUB24 Custodial Services Ltd ABN 94 073 633 664, AFSL 239 122 (HUB24) and is current at 22 October 2019. It is only for use by Australian Financial Services License (AFSL) holders and their authorised financial advisers. It is not for use by retail clients. HUB24 is the operator of HUB24 Invest (an investor directed portfolio service), promoter and service provider of HUB24 Super which is a regulated superannuation fund. The trustee and issuer of interests in HUB24 Super is Diversa Trustees Limited ABN 49 006 421 638, AFSL 235 153, RSE License No. L0000635 (Trustee). The information in this document is intended to be general information only and not financial product advice. It does not take into account any person's objectives, financial situation or needs. It is not legal advice. Accordingly, before acting on any of this information, the reader should consider the appropriateness of the information having regard to their or their clients' objectives, financial situation and needs. This information is based on the experience of a single Advice Licensee. It relates to that Advice Licensee's experience and is provided for illustrative purposes only.

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Client trust

How managed accounts are helping advisers ‘build the trust equation’ While the benefits of managed accounts for clients are well-documented, there are also numerous benefits that they bring to businesses, writes Xplore Wealth’s Anne Hamieh.

inancial advisers are under a significant amount of strain in this evolving industry as they face technological advancements such as robo-advice and challenging market conditions with low interest rates while endeavoring to deliver best in class service to their clients. Add to this the pressure mounting from Government, regulators and internal market forces to adapt and thrive. This sustained pressure, which has increased following the Hayne Royal Commission and its 76-point recommendations, is fundamentally testing business models, remuneration, revenue sources and business valuations. Every aspect of financial advice is under the microscope as the sector complies with increased educational and compliance requirements, under the banner of renewed regulatory and community expectations. This focus is driving greater numbers of advisers to re-think their licensing and business model arrangements, re-calibrate their valueadd to clients, and reinforce their role as the ‘trusted adviser’ in the lives of their clients. At a structural level, the previous dominance

of institutionally-owned, vertically-integrated advice models is unwinding. There is pressure on advice businesses to form new fee and revenue arrangements, while the implementation of the Financial Adviser Standards and Ethics Authority (FASEA) regime is also adding time and cost burdens to advice businesses. An outcome of the Royal Commission is heightened scrutiny and increased regulatory and compliance costs. Regulators will remain under pressure to be more active in enforcement of advisers’ client ‘best interest’ obligations. So, is the consequence of all this change an industry bogged down in regulation, or one moving forward to fresh opportunity? We think it’s the latter and we see a stronger, selfdetermined industry that is striving to uphold its reputation as a respected and trusted profession.

A trust rebuild underway Research conducted by Xplore Wealth has reinforced our belief that use of managed accounts in client portfolio management offers advice businesses the potential to deliver an improved client experience. This can take the shape of increased portfolio flexibility and transparency,

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Client trust

greater tax-effectiveness, reduced costs, and the opportunity to free up the adviser’s time. This ‘time release’ from administrative tasks helps the adviser to develop deeper relationships with existing clients and a better understanding of their goals and objectives. There is also a potential ‘efficiency benefit’ from increased adviser and practice productivity and opportunities for scaling the business through the devotion of more time to identify and develop new client relationships. According to research undertaken by Business Health and the Institute of Managed Account Professionals (IMAP) , 87% of advice practices surveyed indicated that they had

reduced their administrative workload since adopting managed accounts in portfolio construction, and the practices surveyed reported having on average 7.4 weekly client appointments compared with six industry-wide. Similarly, over three-quarters (79%) of the advisers surveyed in the Investment Trends 2019 Managed Accounts Report indicated that they believed that using managed accounts was a benefit to their clients, 74% agreed that it helped their business, and two-thirds believed that using managed accounts had a positive impact on their client value proposition. Continued on page 24

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Client trust

Continued from page 23 Xplore recently sought the insights of a number of advice professionals about their perspectives and practical experience of the ‘efficiency benefits’ gained from using managed accounts in their clients’ portfolios. A number of key themes emerged (adviser quotes in italics). • The ability of managed accounts to accommodate the specific needs of advice businesses and clients – “clients increasingly want a bespoke experience, and you the advice business have to be able to deliver”; • The ability to construct and manage a flexible and diversified portfolio to enable clients to achieve their goals – “you can give the client reassurance that they can do the lifestyle things they want to do”; • Eliminating the need for a record or statement of advice for every transaction, reducing the administrative burden for the client as well as for the adviser – “we can now run the wealth/investment side of the business with much reduced paperwork ” – and the ability to implement change simultaneously, reducing time-lags updating individual client portfolios and delivering a better client experience;

• The ability to tailor portfolios to meet the specific needs of different client age cohorts – “for the older cohort, those in their 50s and 60s, who can't afford to have massive write-downs in the value of their investments as they approach retirement, we need to have models that meet this specific need. This is what managed accounts allow you to deliver, rather than just standard one-size-fits-all product solutions”; • Opportunities for more effective management of the tax implications of asset ownership and transactions, and the significant benefits associated with the beneficial ownership structure in management of capital gains tax scenarios, as the client’s tax position is unaffected by the actions of other investors, compared with unlisted managed funds – “we can make more effective tax decisions based on the client's individual holdings”; • Increased opportunities for devoting more time to reviewing and better understanding existing clients’ attitudes and goals, undertaking behavioural coaching conversations, and initiating and developing new client relationships – “I have a profitable Continued on page 26

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ESG

We see a stronger, selfdetermined industry that is striving to uphold its reputation as a respected and trusted profession.

â&#x20AC;&#x201C; Anne Hamieh, Xplore Wealth

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Client trust

Continued from page 24 business largely because I've been able to focus more on the relationships rather than the mechanics of investments”; and • Enabling client conversations to become less of an investment discussion – “to just be across the investment piece is doing a disservice to the client ” – instead developing deeper relationships, learning more about their circumstances, being able to learn more about clients’ families and take a multi-generational view on their situation, and being able to develop strategies to mitigate the risks and stresses in clients’ lives. We believe managed accounts supported by high-functionality technology through a single platform, a broad range of local and global investment choices and backed by transparent

fee structures and reporting provide a significant efficiency benefit for financial advisers. . They enable advisers to manage client portfolios more effectively, eliminate timeconsuming manual activities, to deliver quality financial advice in the client’s best interests, This in turn helps to strengthen their value proposition as the valued partner enabling the client to achieve their financial and lifestyle goals. All of this ultimately contributes to helping the adviser “build the trust equation” – developing the deeper, trusted client relationships which are the foundation for sustainable advice businesses and ultimately greater confidence in the evolving financial advice profession. Anne Hamieh is head of distribution and marketing at Xplore Wealth.

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Managed accounts

Waiting for an ASIC outcome Laura Dew explores how the managed account space could change in the future as the industry awaits the conclusion of an ASIC review of the sector.

he managed accounts space is waiting with ‘bated breath’ the outcome of an investigation by the Australian Securities and Investments Commission (ASIC) into the growing sector. Last year, it was announced ASIC would be carrying out an ‘information gathering’ exercise to understand the sector and how it works. It is now due to issue a subsequent paper on the operation of managed account portfolios including where an advice licencee is involved in formulating the investment approach. The body said it was ‘carrying out information gathering on harms, risk and regulation of platform and managed discretionary accounts (MDAs) and considering necessary changes to regulatory settings’. An MDA includes separately managed accounts, managed accounts or managed discretionary portfolio services. Within this structure, the manager is given responsibility to manage a portfolio according to prescribed guidelines and the service usually includes administration, investment management and financial advice. Their appeal lies in the fact investors may not

have the time or skills to do this themselves while also giving them exposure to a wider range of asset classes. For advice businesses, they are a more efficient option and allow for lower administration costs and greater time saving. Since coming into formation, assets held in MDAs have grown and have particularly grown sharply in recent years. According to figures for 30 June, 2019, from IMAP and Milliman, total funds under management in managed accounts stand at $71 billion. This was an increase of $9 billion from the start of 2019 when they were $62 billion. This was divided between $4.4 billion from seperately managed accounts (SMAs), $2.7 billion in MDAs and the remainder distributed between other types of models. MDA products remained the most popular type at $29.2 billion but platform-based seperately managed accounts were growing in popularity and catching up with MDAs at $25.5 billion in funds under management. However, they were described as being a ‘blind spot’ for the regulator by former ASIC commissioner Greg Tanzer, who said ASIC was particularly interested in conflicts of interest by MDA providers and financial advisers and

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Managed accounts

worried that MDAs did not always meet clients’ best interests. As a result, ASIC sent questionnaires to a number of platforms, operators, licensees and providers to ensure a range of perspectives on the matter. When the information was released in ASIC’s Corporate Plan, the Institute of Managed Account Professionals (IMAP) said the message was a ‘change in tone’ from the regulator. IMAP chairman, Toby Potter, said: “This is consistent with a more suspicious view of financial services providers and a more assertive regulatory stance.” He said IMAP had submitted a number

of papers to ASIC regarding issues such as the diversity of MDA models, the benefits for clients and the high standard of MDA operation and typical costs. “We are waiting to see what ASIC have to say, they have been doing this info gathering exercise and we are currently waiting for the conclusion. They have been ensuring they have a clear understanding of the way managed accounts operate, the benefits they have and the process for managing conflicts of interest. It is a good thing they are looking into it, they want to make sure they understand how this system works,” Potter said. “We have tried to find out if the exercise was Continued on page 30

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Managed accounts Continued from page 29 driven by a specific instance of client loss that they were concerned about but I’m not aware of any instances within managed accounts.” The potential problems concerning conflicts of interest came in five forms; advisers recommending their own in-house products, revenue via portfolio management fees, overtrading in order to charge more transaction fees, over-servicing of the portfolio and adopting a ‘one size fits all’ approach with multiple clients. But a report by Colonial First State (CFS), which has over $10 billion in managed accounts, entitled 'Managed Accounts: Building Your Future Business‘ said owners of firms which used managed accounts were more confident than their marketplace peers that they were managing conflicts of interest appropriately, were monitoring and supervising their staff and had breach identification, assessment and reporting procedures. Advisers using managed accounts were confident and optimistic about their practices’ growth potential and risk management capabilities and felt the use of managed accounts enabled their businesses to grow. Ben Abell, head of institutional solutions at CFS, said: “We found advisers were surprised by how much of a positive impact managed accounts achieved. They report improved client engagement and communication as they can talk holistically rather than about individual stocks. “They also reported improved investment outcomes which they attributed to being able to make changes quickly and being able to execute

decisions quickly across all the relevant portfolios, rather than any individual investment ideas.” When it came to the financial impact on their businesses, practices using managed accounts had 336 clients per adviser compared to firms without who had 285 and the average funds under management per adviser was $64 million versus $50.8 million. Their revenues were $1.5 million compared to the industry average of $1.1 million. “Interestingly, while revenue is higher for managed account practices, this is being generated from a smaller client base [than their competitors]; the average managed account practice is servicing 614 individual clients compared to the general marketplace of 715.” James Mantella, head of managed investment products at Netwealth, said: “[The industry] expect to receive information from ASIC later this year. They did a lot of work with platforms and investment managers to understand the full focus of the sector. We are waiting with bated breath for the result”. Asked whether the investigation could result in additional regulation for managed accounts, Mantella said he did not expect that to be the case. “That is not ASIC’s intention, they want to ensure the support is stringent as they are new to these types of products and want to tighten their focus on client outcomes and fees. I don’t expect there will be any findings which will shock the industry. The industry has been calling for this for a long time to ensure consistency across platforms and to achieve better outcomes for clients.” Continued on page 32

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Managed accounts

We will see a trend towards personalisation and people using managed accounts to apply their individual world view such as a portfolio with a low carbon tilt. â&#x20AC;&#x201C; Jodie Hampshire, Russell Investments

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100%

Managed accounts

80% 60% 40%

Continued from page 31

20%

Future Dependant on ASIC’s findings, the industry was optimistic on the future of the managed account space with IMAP data estimating the industry could grow to $115 billion by 2020. A study by HUB24 suggested trends in the space would be increased use of artificial intelligence and machine learning to capture and analyse data to improve client investment outcomes and enhance engagement between adviser and clients. “The application of AI is in its infancy in the managed portfolio sector, but its potential is immense. However, employing AI effectively will require an explicit commitment by providers to invest the time and money to make it work effectively.” As well as this there would be customisation

of client portfolios to allow far greater flexibility, 0% group and individual tilts without additional Improved Reduced Improved administration client engagement investm complexity. outcom “While the number of players in the 100% managed portfolios space may proliferate in coming years, not all will be created equal, and 80%the basic functionality many offers have only available. Those that prosper, and support advisers and their clients 60% best will be those with a proven technology track record, a proven ability to remain responsive to clients’ 40% and advisers’ needs, and a constant drive to deliver new features and solutions.” Abell said tailoring was becoming increasingly 20% important and would be helped by improvements in technology. 0% Breach identification, Managing conflicts “We think tailoring is becoming increasingly assessment and fo of interest appropriately important and the improvements in technology reporting procedures

Chart 1: Key benefits of using managed accounts

100%

250%

Chart 2: Managed accounts vs industry average 100%

200%

80%

150%

60%

100%

40%

50%

20%

60% 40% 20% 0%

0% Reduced administration

Improved client engagement

Improved client investment outcomes

Improved risk control of portfolios

Source: CFS

100%

0% $1.53m revenue $1.16m revenue for managed for industry account average practices

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80% 60%

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Reduce 61 administr for accou

100% 80% 60% 40% 20%

are an important driver of this, having that broader range of assets and oved Improvedability client to access Improvedarisk gagement investment control of portfolios customise portfolios. outcomes “Simplification will also be a key theme 100% and this is something we are spending time on at CFS, it is one of the areas where there is the greatest potential100%for improvements and80% 80% making managed accounts easier for a wider 60% range of people to access.” 60% 100% 40% When it came to types of products, Jodie 20% Hampshire, managing director at Russell 80% 0% 40% Investments, said Russell had introduced 100% a range of active managed accounts which 60% 80% 20% she expected would become a more common 40% option in the future. 60% 40% “When we spoke with advisers they said they 0% 20% h identification, Appropriate training Monitoring andactive at a high only had two options of20% being very essment and for themselves and staff supervising staff 0% cost or being very passive at a low cost so they ting procedures Reduced administration

Improved client engagement

Managing conflicts of interest appropriately

Improved risk control of portfolios

Appropriate training for themselves and staff

0% wanted something in the middle. So we launched Reduced Improved Improved client Improved risk four risk profiles which all have an active dynamic administration client engagement investment control of portfolios outcomes multi-asset diversified fund plus Australian equities plus exchange traded funds [ETFs] so they end up with a well-rounded account that combines active and passive management. We think this is a 100% pragmatic way to approach asset allocation.” 80% “[In the future] I think we will see a trend 60% 100 towards personalisation and people using 40% managed accounts to apply their individual world 20% 80 view such as0%a portfolio with a low carbon tilt. “I can also imagine we will see more 60 100% unbundling where the investor is able to view their 80% full portfolio.” 40 60% This was confirmed by Abell who said 40% 20 transparency and greater visibility was a key desire 20% for CFS clients and a reason why they opted for training Managing conflicts Breach identification, Appropriate Monitorin 0 of interest0% appropriatelyin the assessment and for themselves and staff supervisin managed accounts first place. reporting procedures Reduced administration

Industry average

Monitoring and supervising staff

715 clients for industry average

Managing conflicts of interest appropriately

Breach identification, assessment and reporting procedures

Appropriate training for themselves and staff

Monitoring and supervising staff

100%

Managed accounts

Industry average

80%

80% $1.53m revenue $1.16m revenue for managed for industry account average practices

60%

614 clients for managed account practices

Improved client Improved risk investment control of portfolios outcomes

Managed accounts practice

100% 50%

Improved client engagement

Reduced Improved Improved client Improved risk administration engagement investment of portfolios Chartclient 3: Risk management confidencecontrol levels outcomes

200% 150%

Improved client investment outcomes

Breach identification, assessment and reporting procedures

250%

ounts

nue y

Managed accounts

614 clients for managed account practices

715 clients for industry average

Managed accounts

Industry average

60%

40%

20%

Managing conflicts of interest appropriately

Breach identification, assessment and reporting procedures

Appropriate training for themselves and staff

Monitoring and supervising staff

250% 200%

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150%

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