For advice firms of a reasonable size, in-house managed account portfolios can be a great way of building investment solutions for clients and bringing efficiencies into a business, but they also come with their challenges. Veronica Klaus (Lonsec) and David Wilson (JANA Investment Advisers) discuss the pros and cons of in-house managed account portfolios
In-house managed account portfolios offer advice businesses a range of advantages, including potentially lower costs and tailored investment strategies, but they also come with some challenges, like higher operational risks and potential conflicts of interest.
An in-house managed account portfolio refers to a portfolio of investments managed directly by a financial business (like a financial advice group or advice practice) that also provides the managed account. Instead of an advice business outsourcing the management of its investments to a separate fund manager or platform, the advice business is responsible for operating its managed account, while also being responsible for the investment decisions.
By Jayson Forrest
Caitriona Wortley
Drummond Capital Partners
David Wilson
JANA Investment Advisers
Veronica Klaus
Lonsec
Whilst acknowledging the challenges of building in-house managed account portfolios, Veronica Klaus — Head of Tailored Solutions at Lonsec — believes there are also many positives, which makes this a compelling offering for advice businesses. However, she qualifies this by adding that ultimately, the suitability of an in-house approach depends on factors like a firm’s size, resources, expertise, and governance framework.
“For firms of a reasonable size that have a clear understanding of their clients’ needs and objectives, then in-house managed account portfolios are a great way of building investment solutions for clients, while bringing efficiencies into a business,” she says.
Some of the positives Veronica refers to of in-house managed account portfolios include:
- greater customisation and tailoring of investment strategies to the needs and preferences of clients;
- enhanced oversight and control of the investment process;
- improved client engagement and relationships;
- potentially lower costs; and
- increased efficiency for both advisers and clients.
Joining Veronica in a discussion on ‘The pros and cons of in-house managed account portfolios’ at the IMAP Advice in Action 2025 conference, David Wilson — Senior Investment Consultant at JANA Investment Advisers — agrees there are many positives in building the case for in-house managed account portfolios. However, he believes advice businesses also need to consider possible challenges of going down this path.
“Resourcing is a challenge for many advice businesses,” he says. “Setting up an in-house program usually takes much longer than what most people expect. Things can go wrong with in-house portfolios, particularly in terms of performance, so you need to be accountable for that with your clients.”
Other challenges of in-house managed account portfolios that advisers need to consider include:
- higher operational risk and costs, requiring significant investment in infrastructure, technology, and talent;
- specialist expertise is required to run the portfolio;
- potential conflicts of interest, which may arise between the firm’s interests and the client’s, particularly when the firm is also the investment manager; and
- potentially limited portfolio diversification compared to a manager with access to a wider range of assets and strategies.
Building the investment portfolio is the easy part; the hard part is ensuring you have appropriate integration of the managed account across your whole network of advisers and clients. And that can be a real challenge for some advice groups. Ultimately, the suitability of an in-house approach to managed account portfolios depends on a range of factors, including a firm’s size, resources, expertise, and governance framework
Making the transition
According to Veronica, when building a tailored managed account, it’s important for businesses to think carefully about what this structure means to their clients, as well as ensuring their investment philosophy is clearly articulated and carried through their governance framework.
“It’s not easy building an in-house managed account. There’s a lot of work involved and a business really needs to be of a reasonable size to be able to do it successfully,” she says. “And even when you’ve built your managed account, you need to actually be able to transition your clients into this structure. Unfortunately, people tend to forget that. There’s no use building a product and not being able to transition your clients into it.”
Veronica adds that even if less than half of a firm’s clients are transitioned into the managed account, the advice business still doesn’t realise any gains in efficiency that it would have got by having all its clients in the product. This means a business effectively increases the amount of work it’s doing, but with no efficiency gains.
“Building the investment portfolio is the easy part; the hard part is ensuring you have appropriate integration of the managed account across your whole network of advisers and clients,” says Veronica. “And that can be a real challenge for some advice groups. Ultimately, the suitability of an in-house approach to managed account portfolios depends on a range of factors, including a firm’s size, resources, expertise, and governance framework.”
What’s most important for us is that good, sound decisions are being made in a tight governance framework
The investment committee process
As asset consultants, both Lonsec and JANA are regularly called upon to share their expertise across a number of investment committees. When partnering with a client, Veronica says it’s important to ensure there are synergies around the thought-process in relation to investing. As Lonsec also acts as the investment manager for clients, Veronica says this synergy means it’s rare to have any situations where there is disagreement with clients.
“It comes down to the relationship you have with your clients, including the conversation you’re having with them around portfolios from an investment committee perspective,” she says.
David agrees. He says it’s important that both the asset consultant and the client are both comfortable with the investment decision-making process. “What’s most important for us is that good, sound decisions are being made in a tight governance framework,” he says.
Veronica adds that as part of the investment process, it’s also important to ensure that debate between the respective parties is healthy.
“We have rigorous debates with our clients, but that’s what you want, because you’re getting buy-in into the portfolios. At the end of the day, we’re constructing portfolios with our clients, for our clients. It’s a holistic relationship, so it’s important to be very respectful of the client’s views.”
She says no one on the investment committee is the convenor of good ideas. Everybody is responsible for bringing together different views across the portfolio construction process — whether that’s fund selection, macro views, and investment strategies.
“As a profession, when building out managed accounts, we tend to underestimate how important existing investments are for clients, and we also underestimate the importance of the conversations advisers have with their clients around investments,” says Veronica.
“The transition from a model portfolio to a managed account is a big shift for advisers and advice practices. The last thing you want to do when building out a managed account, is to have the adviser say to their client: ‘We’re moving into a new structure, and all the previous funds you’ve been investing in are rubbish. So, we’re going to start from scratch with new funds.’ That’s not the way it works,” she says.
“Instead, it’s about transitioning an existing model into a managed account structure, which may include moving across existing investments, if they’re still appropriate for the portfolio and the client’s objectives.”
We have rigorous debates with our clients, but that’s what you want, because you’re getting buy-in into the portfolios. At the end of the day, we’re constructing portfolios with our clients, for our clients. It’s a holistic relationship, so it’s important to be very respectful of the client’s views
Portfolio considerations
One of the potential advantages of in-house managed account portfolios are their lower cost. David says the rise of the managed accounts industry has seen portfolio fees come down, which is resulting in the institutionalisation of the retail market.
He points to the last couple of months where the rebates on offer for managed accounts from fund managers (both domestic and large globals) are significant, with the gap closing between passive and active managers. He believes this is partly due to active managers losing money to passive, which is making active management fees more palatable for investors.
Veronica believes that using ETFs in a portfolio does change the conversation for clients. She says there are certain times in the market where beta is very cheap, and that’s when it’s most effective to bring in passive strategies/ETFs into a portfolio. Conversely, there are other times when beta isn’t cheap, so clients would be better with an active exposure.
“You can have these types of conversations with your clients, and really align the portfolio to medium-term thematics that we’re currently seeing in the market,” she says.
And what about ‘Magnificent Seven’ ETFs and Nasdaq ETFs? Are these the type of investments JANA and Lonsec consider or are they more likely to be investments that are client-driven when building managed account portfolios?
While JANA doesn’t like or use smart beta-type ETFs (a blend of active and passive investing), Lonsec has never been a “massive fan” of very specific thematics in most of the client portfolios it’s seen.
“We do have some clients that tend to like esoteric exposures, but when you have an explicit exposure to a thematic like that, you’ve got to be very good with timing,” says Veronica.
She adds that these types of conversations often happen around satellites that can blend with a managed account. For example, a licensee may have a portion of its clients segmented as very high-net-worth, and it wants to use different types of asset classes for these clients.
“That’s where we have many conversations around alternatives, private equity and private credit,” says Veronica. “At Lonsec, we can build any type of portfolio a client wants, that’s the whole point of tailoring. We’ve got passive strategies that have a Dynamic Asset Allocation (DAA) overlay; we’ve got fully active strategies; we’ve go some with alternatives; we’ve got some without alternatives — you name it, we can do it. It’s all about what the client needs within their fee budget.”
However, she doesn’t deny the impact technology is having in the portfolio construction space. She particularly refers to the rapid adoption and use of artificial intelligence (AI). Evidentia Group (which Lonsec is a part of) is already spending a great deal of time integrating AI into its business and capabilities, including tools to help advisers with commentary and reporting.
It’s a similar story at JANA, where advancements in technology are helping the business with its research process, including writing research reports, as well as gathering and analysing data.
“For JANA, it’s about leveraging resources to try and figure out how best to use technology, because it’s changing so quickly,” says David. “Technology is reshaping the way all businesses work.”
We find that our clients will try and get most of their clients into a managed account structure, and for those clients who are wholesale, they’ll look to add satellites, like private equity or unlisted property, as opposed to creating a pure wholesale portfolio
Wholesale vs retail
Increasingly, advisers are focusing on wholesale clients and offering managed account solutions to this segment. David says the key difference when constructing portfolios for wholesale clients tends to be in the core-satellite approach.
“We find that our clients will try and get most of their clients into a managed account structure, and for those clients who are wholesale, they’ll look to add satellites, like private equity or unlisted property, as opposed to creating a pure wholesale portfolio,” says David.
According to Veronica, Evidentia provides a comprehensive range of managed account solutions, including tailored SMAs and MDAs. She believes whether a client chooses an SMA or MDA, the key is to maintain a very clear focus on the portfolio, particularly for MDA clients.
“We want to keep our SMAs as daily liquid. I know there are some platforms that are starting to offer monthly liquidity, but we find it’s cleaner — particularly when you’re rebalancing — to have daily liquid strategies in your SMA.”
Let’s not deny that managed accounts are about bringing greater efficiencies into the system, so a performance test would create complexity… I think if a performance test forces portfolios to look more and more like a benchmark, that’s not a good thing, especially considering most end clients seek advice as they are nearing retirement, and retirement portfolios are not about matching a benchmark
ASIC and the Performance Test
In Consultation Paper 200 (Managed discretionary accounts: Updates to RG 179), ASIC has started to turn its attention to underperforming investment options. David is concerned that something like a performance test for managed accounts (similar to the annual APRA performance test that evaluates the performance of superannuation products) is likely to eventuate from the regulator.
“It’s clear that something is coming,” says David. “However, what it will eventually look like is still up for debate. From my perspective, anything that lifts the governance of the industry in relation to performance and client outcomes is a positive.”
Whilst agreeing with David about improving governance standards, Veronica acknowledges that any performance test for managed accounts would create significant additional work for the industry.
“Let’s not deny that managed accounts are about bringing greater efficiencies into the system, so a performance test would create complexity,” says Veronica. “Personally, I’m not convinced this is the right way to go, because ultimately, the end client is an advised client, unlike in a superannuation fund where they’re not.
“So, I think if a performance test forces portfolios to look more and more like a benchmark, that’s not a good thing, especially considering most end clients seek advice as they are nearing retirement, and retirement portfolios are not about matching a benchmark. I would hope that if a performance test does come in, it doesn’t move us away from the value of providing retirement advice to clients.”
About
Veronica Klaus is Head of Tailored Solutions at Lonsec; and
David Wilson is a Senior Investment Consultant at JANA Investment Advisers.
They spoke on the topic of ‘Pros and cons of in-house managed account portfolios’ at the IMAP Advice in Action 2025 conference.
The session was moderated by Chetan Trehan — Sector Head, Real Assets, Alternatives and Multi-Asset Funds/SMAs at SQM Research.