Practical implementation of managed accounts

By Jayson Forrest

Frances Taylor (Colonial First State), Ty Cockle (Financial Foundations Australia), and Daniel Vanderzeil (Colonial First State) provide some practical considerations about implementing managed accounts in a financial advice business.

Looking back over 10 years, managed accounts have come a long way in their development, which have primarily been driven by gains in efficiency when building and managing portfolios. During this time, advice firms have capitalised on the growth of managed accounts by adjusting their business’s investment philosophy and delivering that in a managed accounts structure.

“Today, as a result of using managed accounts, we’re seeing many advice businesses with an enhanced product offering and client value proposition,” says Frances Taylor — Executive Director, Managed Accounts at Colonial First State

In a discussion on ‘Real life examples of practices having implemented managed accounts on a scale’ at the IMAP Advice in Action 2024 conference, Frances says there’s been a definite evolution of advice business models that have harnessed the efficiencies of managed accounts  as part of their overall offering.

Whilst there are numerous benefits to businesses by using managed accounts (such as efficiency gains, outsourcing investment selection, and portfolio optimisation), according to Ty Cockle CFP^® — CEO and Financial Adviser at Financial Foundations Australia — it’s essential that advice practices take their team along on the journey when transitioning to managed accounts.

“It’s critical that your team properly understands why you’re implementing managed accounts, and how it will affect them, their clients, and the business overall. It’s also important that advisers are able to explain this to clients in a way that is easy to understand,” says Ty. “When transitioning to managed accounts, you need to ensure that every step of the way has clear buy-in from both advisers and clients.”

Reflecting on his journey with managed accounts, Ty says the biggest benefit his business has derived from implementing managed accounts has overwhelmingly been the improved client experience.

“If you can control the client experience, you’re doing really well,” he says. “From a reporting perspective, clients are kept updated with what’s happening with their investments. We have a well-diversified approach and we are very invested in the philosophy of managed accounts. Importantly, when it comes to managed accounts, all our advisers are singing out of the same hymn book.”

Currently, Financial Foundations Australia has approximately $500 million invested in managed accounts. Ty says the business uses its scale to work with asset consultants to help drive down costs. While most of the business’s clients have exposure to managed accounts — those clients between $750,000 and $2 million would be heavily aligned to managed accounts — for the firm’s high-net-wealth (HNW) and ultra-HNW clients (who have upwards of $5 million to invest), not only do they have exposure to managed accounts, but they also typically have illiquid assets as part of their overall portfolio.

“For these HNW clients, not only do they have exposure to managed accounts via a platform, but around the core managed account sits direct wholesale funds. This allows our HNW clients to access opportunities that can only be obtained in the wholesale market,” says Ty.

“That’s because managed accounts do have an issue when it comes to illiquidity. So, we don’t put anything in our managed accounts that have illiquidity issues, because this creates a number of problems around rebalancing and capital lock up. Instead, we want our managed accounts to be liquid, so we use wholesale funds to access illiquid opportunities for our HNW clients.”

Financial Foundations Australia has also run risk profile-based managed accounts with a global equities sleeve for its SMSF clients, “because many of the practice’s SMSF clients have inherently large exposures to Australian equities, which the business wants to diversify away from,” says Ty.

When it comes to investing, Daniel Vanderzeil — Head of Managed Accounts at Colonial First State — says there is a trend to a core/satellite approach with the tailored SMAs that Colonial is involved with.

“This core/satellite approach includes an allocation to both passive and active — anywhere from 50 per cent each way to 70 per cent passive. There’s definitely a trend in balancing total cost with some alpha,” says Daniel.

Frances is confident the market will see further evolution in the managed accounts space, particularly from a performance perspective.

She explains: “There is a focus on fund and investment performance. However, as an industry, we haven’t reached a stage yet where we rate managed accounts and their performance evenly across the industry, and that makes it hard to compare them. Only by rating these structures can we more confidently identify specific managed accounts that perform the way an adviser wants them to for the client. Looking ahead, I believe we will see managed accounts rated, which will be beneficial for both advisers and licensees.”

From a liquidity perspective, Daniel expects to see changes in how SMAs handle less liquid assets. He acknowledges that platforms are currently restrictive on the use of private market assets when building SMAs, particularly retail ‘off-the-shelf’ offerings. However, he says work is happening around building private market specific SMAs that are available for wholesale investors.

“These structures will have liquidity restrictions in them,” he says. “Already, there are a few platforms working on them and possibly even rolling out some SMA solutions in the coming months.”

Frances adds that fractionalisation will enable a greater range of assets to be accessed by retail clients in their managed accounts structure, including international shares.

“I believe we will also see more happening with direct indexing,” she says. “Also, we can expect to see less illiquid assets become more accessible to retail investors. However, there is still a lot of work required in relation to connecting investments and technology in this space, but it’s happening.”

Ty Cockle CFP^® is CEO and Financial Adviser at Financial Foundations Australia;

Frances Taylor is Executive Director, Managed Accounts at Colonial First State;

and Daniel Vanderzeil is Head of Managed Accounts at Colonial First State.

They spoke on ‘Real life examples of practices having implemented managed accounts on a scale’ at the IMAP Advice in Action 2024 conference.

This session was moderated by Daniel Vanderzeil in Melbourne and

Michelle Krig — Director, State Leader NSW, Colonial First State — in Sydney.