Are SMAs a good solution for everyone?

31 October 2019

Separately 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.

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.

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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, 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 financial planning industry, including the fallout from the Royal Commission, this was a difficult time for advisers to embrace new offerings.

“One thing about advisers today is that they are not waiting and thinking do I need a global SMA? They are thinking about the FASEA [the Financial Adviser Standards and Ethics Authority] exams and accreditation,” Moore said.

When it comes to global equities, in many cases funds were doing their job and there were plenty of great global equity managers out there, but at the same time there were a growing number of advisers who had used local SMAs in the past and had a positive experience and they were now ready to start using global SMAs.

Moore noted that Australian investors, in general, did not have the option to own direct global equities for a long time and currently there are still only four major platforms that enable global SMAs to sit on.

AllianceBernstein noted that the newer platforms such as HUB24, Praemium, Netwealth and Mason Stevens all enabled global SMAs whereas the incumbent players were ‘yet to do so’.

“I’m super excited that we are on the fastest-growing platforms,” Moore said, adding that it was equally important for the clients to be able to use the platforms with a right set of functionalities.

“If advisers are familiar with their [platforms] technology then it’s great, it works really well. If they are not familiar with it – it seems not to be the audience that we are looking for,” Moore said.

As far as the compatibility between of SMAs and assets classes was concerned, Moore said: “It would be difficult to put fixed income portfolios into an SMA, particularly for global/diversified bond strategies that typically hold 500+ securities, have high turnover and use the derivatives markets actively.

“A single asset class SMA (global or local equities, for example) offers, in our view, important differentiation, as we have seen tremendous growth in multi-asset managed accounts that use a combination of listed vehicles (listed investment companies, exchange traded funds, direct stocks and SMA’s) and managed funds.”

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