Investors who use financial planners are increasingly likely to have their planner recommend that they use a separately managed account. The problem is they don’t know what they are.
Separately managed accounts are similar to traditional managed funds but instead of purchasing units in a trust, with legal ownership of the assets in the hands of a trustee, investors directly own and control the portfolio of underlying securities.
Advisors say this important difference brings with it a number of advantages for investors, including a different tax treatment, the potential for lower costs, and transparency and engagement.
The research suggests these advantages are real. According to the latest report by Investment Trends and State Street Global Advisors, the number of financial planners who recommended managed accounts has almost doubled in the last five years.
Investments Trends reports that 35 per cent of planners used managed accounts last year, up from 30 per cent the previous year. Among independent financial advisers, this rose from 37 per cent in 2017 to 47 per cent last year.
The survey found that 59 per cent of respondents saw transparency as a benefit for their clients and 41 per cent cited direct ownership of shares.
State Street’s head of SPDR ETFs, Australian and Singapore, Meaghan Victor, says: “These potential users have strong appetite to build their understanding further as they want to tap into the tangible benefits reported by current users.”
Investment Trends found that 40 per cent of planners that would potentially use managed accounts considered client education as a barrier. So as more advisors plan to sell them it is important for investors to know exactly what they are and how they operate.
Head of managed accounts at BT Financial Group, Zac Leman says: “The industry has been struggling for years around definitions of what each of these structures are, and the terminology is interchangeable, and different platforms use different terminology which doesn’t do us any favours.”
There are a few terms mentioned when discussing managed accounts, such as separately managed accounts (SMAs), managed discretionary accounts (MDAs) and individually managed accounts (IMAs).
HUB24’s chief executive, Andrew Alcock says: “Technology is allowing managed accounts to follow the allocation the manager has and purchase the assets in a non-unitised structure and allow the investor own the shares in their own right.”
The different structures provide different outcomes for investors depending on their circumstances and financial goals. An SMA, managed account and managed portfolio are interchangeable terms for an administration service that gives the assets to the investor.
Victor says: “An SMA is basically the wrapper that sits around the underlying investments and a responsible entity manages the SMA. They have the autonomy to be able to trade in the absence of investor approval.”
An SMA is a product and each investor gets the same portfolio under the expertise of an investment manager. Originally an SMA just referred to holding Australian equities and now they hold all different assets such as ETFs, cash or direct equities.
This is structure is popular with planners as Investment Trend’s survey found that 68 per cent of planners implement managed accounts via SMAs.
An MDA is a legal structure that allows the advisor to trade continuously on behalf of the investor without their instruction and can be used over any product structure. There are specific license authorisations required to operate an MDA.
HUB24’s Alcock says: “It is almost a power of attorney and advisors have to report to the client more regularly and provide a statement of advice every 13 months.”
An IMA is a customised service suited to high net worth investors. While the investment manager’s approach will be the same for all investors, it allows more customisation under the managed account structure so investors can inform the manager of their investment requirements and pick individual stocks.
“IMA technology can influence the manager to take into account the investor’s preferences but is still outsourcing the investment decisions to the manager,” Alcock says.
Managed accounts have the benefit of allowing investors to manage their tax position. As the investor owns the underlying assets, they do not inherit existing tax positions like in a managed fund.
There is the flexibility for the investor to see which tax parcels they would like to sell and to take into account capital gain and loss positions. In the case of changing managers, investors do not have to sell all their holdings to move which saves greatly in transactions costs.
Alcock says: “The investor can keep holding the stocks and unwrap the wrapper which keeps continuity of ownership of some of the parcels. In the future they get capital gains tax concessions that they don’t get had if they sold everything and rebought them.”
Aside from tax and cost effectiveness, transparency is a significant benefit for investors as they have constant access to portfolio reporting and information about their stocks, transactions and fees which in turn increases investor engagement.
With the changes in regulations for financial planners, the adoption of managed accounts will continue to increase as there are lower compliance requirements and better outcomes for their clients.
Investment Trend’s chief executive Michael Blomfield says: “What we need to do with managed accounts I think is go back to basics and be explaining across the industry over and over again, what managed accounts are, what the three kinds are, how they’re different, who they’re for and why they’re good.”