The fundamentals of managed accounts

By Jayson Forrest

Brett Sanders (Philo Capital Advisers) and Will Riggall (Clime Investment Management) explore some of the fundamentals of managed accounts, including their benefits, governance, and the likely evolution of this investment structure.

As an investment structure, managed accounts provide numerous benefits for investors, advisers, and licensees. Typically, most investors are exposed to one of two types of managed accounts: Separately Managed Accounts (SMAs) and Managed Discretionary Accounts (MDAs).

Addressing an IMAP webinar on ‘Managed Account Fundamentals’, Brett Sanders — Chief Executive at Philo Capital Advisers — and Will Riggall, CFA — Chief Investment Officer at Clime Investment Management — review the key benefits available to stakeholders (investors, advisers, and licensees) when using managed accounts.

 

The fundamentals of managed accounts
Philo Capital
Clime Investment Management
Brett Sanders is Chief Executive at Philo Capital Advisers
Brett Sanders - Philo Capital Advisers
Jaime Johns — Non Executive Director at Mason Stevens
Jaime Johns - Mason Stevens
Will Riggall, CFA is Chief Investment Officer at Clime Investment Management
Will Riggall, CFA - Clime Investment Management

Therefore, the value in the client/adviser relationship comes with ‘understanding’, which is a direct result of having more time to engage in deep and meaningful conversations with clients. Managed accounts significantly free up an adviser’s time to allow this to happen

Will Rigall, CFA

The benefits of managed accounts for Investors

The obvious benefit for investors of using managed accounts is the discretion this structure provides to enable the rebalancing of portfolios much faster than traditional portfolios. This means investment decisions can be made and implemented more quickly than traditional portfolio rebalancing, which requires client consent — a process that can take months to complete across a client base.

According to Brett, rebalancing portfolios faster has obvious performance implications for investors. He adds that managed accounts are also more equitable for investors, as they are treated fairly along with other investors with the same risk profile when their portfolio is rebalanced.

“Managed accounts also provide an ‘easier to own’ experience. Investors don’t have to authorise any changes being made to their portfolio (as investment discretion is passed to the adviser) or have to worry about Records of Advice (ROA) constantly appearing in their inboxes.”

Brett also believes managed accounts considerably reduce the stress felt by investors, whilst the efficiency gains of using this structure helps to improve conversations and the overall quality of the client/adviser relationship.

It’s a view supported by Will who believes the real value for investors of using managed accounts lies in the transparency of the structure.

“Clients want reassurance their investments are being properly managed by an advice professional. The transparency of the managed accounts structure can provide this reassurance.

Clients can log into their platform and see for themselves how their investments are performing,” says Will. “This provides clients with peace of mind, knowing their investments are being managed in their best interest.”

While there are many similarities between SMAs and MDAs, because of the different structures — one having a PDS and the other without one — we believe an MDA structure provides a little more flexibility

Brett Sanders

The benefits of managed accounts for Advisers

By removing requirements for Statements of Advice (SOA) and Records of Advice (ROA), the managed accounts structure provides significant efficiency gains for advisers. In addition, passing the investment decision-making process to investment specialists or third-party providers enable advisers to spend more time with their clients in delivering advice.

In terms of investments, Brett believes the managed accounts structure is able to better support advisers, with the flow of information coming from portfolio managers keeping advisers up to date and more equipped to have informed investment discussions with their clients. Potentially, this can also lead to more referrals for an advice practice, as clients enjoy the overall experience of using managed accounts. 

Will agrees managed accounts significantly free up an adviser’s time by essentially removing them from the investment decision-making process and allowing advisers to spend more time with their clients, in order to understand their needs and goals.

“To properly understand the needs and objectives of clients, advisers need the time to have appropriate conversations with their clients. Having deeper client conversations actually helps advisers to deliver good advice, which assists clients achieve their objectives,” he says.

“Therefore, the value in the client/adviser relationship comes with ‘understanding’, which is a direct result of having more time to engage in deep and meaningful conversations with clients. Managed accounts significantly free up an adviser’s time to allow this to happen.”

Importantly, Brett adds that managed accounts also remove many of the conflicts associated with advice. He says for many advice practices, rebalancing portfolios in a traditional way by rolling a change through a client base can cost up to $20,000 in staff time, depending on the size of the practice. As a result, when it comes to making portfolio changes, a practice needs to decide whether to make the change, which can be costly, or do nothing and save on costs.

“To do the latter is a major conflict and is non-compliant with the Code of Ethics,” says Brett. “Managed accounts — whether an SMA or an MDA — essentially removes that issue. That’s because it’s purely about investment merit, as the marginal cost of acting or not acting is about the same.”

According to Brett, when speaking to advisers who do not use managed accounts, they often feel deeply uncomfortable about a lack of fairness in the way they are treating their clients with their portfolios. He believes advisers take great comfort knowing that when using a managed account, all their clients with a similar risk profile are in the same portfolio.

“So, when an adviser chooses to make a change and rebalance the portfolio, all their clients get dealt with at the same time,” says Brett. “This provides uniformity in the decision-making and investment implementation process. All clients are treated the same, regardless of whether they’ve got $100,000 or $1 million.”

For licensees, the focus is increasingly on the management of risk. Scale is also an important consideration for licensees, so delivering an investment solution as efficiently as possible does allow for a very scaleable platform that licensees can grow.

Will Rigall, CFA

The benefits of managed accounts for Licensees

For licensees, the benefits of managed accounts include reducing and managing the risks around advice. This is achieved by centralising portfolio management, and applying more expertise, process and rigour to portfolio construction. “That’s a good thing for the quality of the business and for investment outcomes,” says Brett. “By using managed accounts, there is much less opportunity for things to go wrong for the licensee.”

Will agrees that licensees are focused on managing risk, particularly in relation to the provision of advice and whether investments align with the client’s risk profile.

“For licensees, the focus is increasingly on the management of risk. Scale is also an important consideration for licensees, so delivering an investment solution as efficiently as possible does allow for a very scaleable platform that licensees can grow.”

Will adds that by implementing a managed accounts solution, licensees are also more likely to attract like-minded advisers to the business who are naturally drawn to this style of investing.  

Many investors are increasingly holding private market investments and other illiquid assets, which they’d like to see integrated into their managed accounts strategy. The ability to incorporate illiquid assets in managed account structures is coming

Brett Sanders

The difference is in the issuer

According to Brett, there are many similarities between the SMA and MDA structures. These include: a portfolio manager making investment decisions; and a platform that holds the assets in custody, implements the trades, and provides the reporting.  

However, where SMAs and MDAs differ is with the issuer of each respective structure, where there are different regulatory guidelines. For an SMA, which is a PDS-based product of a registered managed investment scheme, the issuer is called a Responsible Entity. Whereas for an MDA, which is not a PDS-based product but a service, the issuer is called an MDA Provider. In both cases, the issuer is responsible to the regulator for the compliance of the service or the scheme.

“While an MDA Provider’s role is similar to that of a Responsible Entity, its role is generally broader,” says Brett. “An MDA Provider will help to design services, and assist more directly with tailoring, implementation and operations of an MDA program. However, an MDA can only be sold with personal advice and that advice must be refreshed no less than every 13 months by the adviser.

“And while there are many similarities between SMAs and MDAs, because of the different structures — one having a PDS and the other without one — we believe an MDA structure provides a little more flexibility.”

However, Brett concedes these two different regulatory approaches does impact investors. For example, a client who doesn’t require a lot of advice or has a smaller portfolio, probably wouldn’t want to be in an MDA because of the additional costs involved in having to pay for the annual process of having the advice renewed.

“So, for larger clients, we think the MDA structure is better because it’s more flexible,” says Brett. “And remember, you don’t need a special authorisation on your licence to provide advice on MDAs. As long as you can advise on managed investment schemes, you’re good to go.”  

The evolution of managed accounts

Looking ahead, Brett believes managed accounts will continue to evolve, and he is confident this will include more model choices for advisers and investors.

“Typically, in multi-asset class managed accounts, you’re choosing between three and five models, but that’s changing,” he says. “When looking at Philo’s client base using MDAs, on average, we have about 12 models and we’ve got some clients with more than 20 models.”

Another change that is occurring is with multi-platform functionality. This means a single managed account service can be offered and accessed across multiple platforms, meaning one set of documentation and processes.  

“We’re also seeing more customisation choices,” says Brett. “Today, we’re seeing options for the substitution and exclusion of assets. We think more of those types of preferences will steadily become available.”

Brett also believes the integration of illiquid assets into managed account structures will happen.

“Currently, most strategies have the presumption of daily liquid investments. However, many investors are increasingly holding private market investments and other illiquid assets, which they’d like to see integrated into their managed accounts strategy,” says Brett. “The ability to incorporate illiquid assets in managed account structures is coming.”     

Operational considerations

For advice businesses thinking about offering managed accounts, Will believes there are a number of important considerations they need to make from an operational perspective.

“When looking at managed accounts and the range of options available on platform, it can sometimes be overwhelming,” says Will. “So, it’s really important to take a step back and have a range of conversations with all the different players in the market, including other advice practices that have successfully rolled out a managed accounts offering. By doing so, you can become more focused on the key things you want to get out of managed accounts.”

Will also believes it’s important for advice practices to properly educate and talk to their advisers about transitioning to a managed accounts service. By talking to other advice practices that have successfully implemented a managed accounts offering, this will help businesses hone their own conversations with advisers within the business.

Will adds that if an advice business already has a well communicated investment philosophy, with a range of assets sitting behind that philosophy that has worked well for the business, then he advises to stick with it, as there’s really no reason to change.

“It’s all about how you integrate your existing value proposition with a managed accounts solution. If needs be, start afresh with articulating what your value proposition really is. However, if your investment philosophy is working, then there’s no need to start from scratch with your asset mix,” says Will.

According to Brett, from a governance perspective, you can set up managed accounts in different ways. This means if you have a tailored program, then decide to what extent the advice firm is involved in the investment decision-making process. Some advice practices choose to have all the investment decisions streamed through their investment committee, while others prefer to delegate that to their investment manager.

“It also depends on how advisers want to represent themselves to their clients,” says Brett. “You can setup the managed accounts structure to suit the way you want to project yourself to your clients. However, I would never advocate an MDA over an SMA exclusively. These are structures that suit different clients and advice practices. Pick the structure that will do the job for you.”

About

Brett Sanders is Chief Executive at Philo Capital Advisers; and

Will Riggall, CFA is Chief Investment Officer at Clime Investment Management.

They spoke on ‘Managed Account Fundamentals’ as part of an IMAP Specialist Webinar Series on ‘Making a success of introducing a managed accounts program: Lessons from experience’.

The discussion was moderated by Jaime Johns — Non Executive Director at Mason Stevens.

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