By their very definition, a managed account is an investment account which is owned by an investor – retail or institutional – and managed by a third-party, such as a financial adviser.
The flexibility, transparency and convenience offered by managed accounts for both advisers and their clients has seen an exponential rise in the take up of the product in recent times.
Advisers are increasingly becoming more discerning and nuanced in terms of the products they seek to offer clients, such as a focus on responsible investment and environmental, social and governance (ESG) or other bespoke client needs in portfolio construction. Managed accounts are unique as they can provide investors with this level of flexibility without sacrificing returns.
Managed accounts have come a long way from those that were on offer in the early days of the industry. These days, managed accounts free up an adviser’s time from the back office administration and compliance, providing them with more time to serve clients and do what they do best – provide financial advice.
Those practices that have adopted managed accounts into their business are not only saving time on compliance and administration – in many instances, they are also more profitable.
Managed accounts provide the reporting to help advisers with the communications piece to their clients, so offer a lot of savings in terms of time. The governance side is also taken care of given a product disclosure statement (PDS) is required for a managed account – and this is something which the model portfolio managers produce on behalf of the adviser.
MANAGED ACCOUNTS IN A POST COVID-19 WORLD
The COVID-19 pandemic was a litmus test for managed accounts and their success during this uncertain period has had a large impact on accelerating their adoption across the industry. As of 30 June, 2021, funds under management (FUM) in managed accounts stood at $111 billion, an increase of $15.8 billion in the last six months.
During the March 2020 market sell-off, a time when there were significant levels of drawdown by investors, advisers working with a managed account structure were able to rebalance all clients seamlessly and efficiently, including all the associated reporting. This would not have been achievable with a simple model portfolio structure.
Many advice practices with a bespoke or non-discretionary model management process found managing 2020’s challenges particularly daunting. Day-to-day tasks such as keeping up with markets, ensuring clients were well informed, processing trades and seeking clients’ approval to rebalance their assets became onerous for them.
It is rare for investment portfolios to deviate from their intended risk profile but this is exactly what many portfolios did when markets plunged during March 2020.
While investment portfolios became increasingly distorted by market activity during this time, rebalancing of client portfolios was critical to ensure they remained in the risk return profile agreed with their adviser.
Speed of execution was paramount, and the nature of managed accounts enabled investment managers to achieve that. Those advisers using managed accounts during this time were able to call on the execution structures of their managed accounts to rebalance portfolios, en masse, as well as handle all the compliance and reporting associated with that.
Despite many advisers being swamped with rebalancing activity during this period, those who were using managed accounts successfully were also able to manage the client hand-holding and extra communication during this difficult period. This was particularly the case for those advice practices with a large client base and therefore more sizeable rebalancing activity required.
Communication also proved to be key during this period of market volatility, and those that were able to ramp up communications with clients were able to effectively quell their concerns.
For advice groups operating a managed account structure for client portfolios, it meant no client was left behind with a portfolio change or rebalance; one portfolio change was effective across the entire client base.
ESG AND RESPONSIBLE INVESTING
With the world’s focus shifting to the impending United Nations Climate Change Conference (COP26) taking place in Glasgow this month, this will lead to a sharper focus in responsible investing (RI) for local investors.
There is an expectation that managed accounts will attract further attention, given RI continues to draw such a large volume of enquiries. Retail investors in particular are increasingly questioning the carbon footprint of their investments and for institutional investors, they will be beholden to the demands of super fund members who seek greater clarity on how and where their balances are invested.
Going forward, RI is likely to be an increasing consideration for advisers and their clients. Advisers are having the conversations with their clients about RI considerations that need to be provided for within a managed account structure.
As investor interest in RI and ESG policies grow, those managed account providers that can leverage research in these areas are set to benefit the most.
In Zenith’s case, its RI classification roll out across all its rated products means advisers have an additional tool to differentiate between funds and identify those best suited to clients seeking an ESG overlay on their portfolios.
Momentum has continued to accelerate on both the product manufacturing and client demand side over the past year. Given the complexities involved, clients have welcomed Zenith’s RI classification framework as it provides clear, consistent disclosures that make it easy to understand what investment managers are actually doing when considering RI issues.
Investor interest, client feedback, manager activity and general market momentum is growing significantly in the area of responsible investing and is reflected in the increased demand for ESG insights from financial advisers.
This has important implications for all managed account providers and the advisers who use their services. Those managed accounts that can meet adviser demand for RI and ESG information will be well placed to benefit from the increased interest in the sector.
THE MANAGED ACCOUNTS DIFFERENCE
In recent years, advisers have designed portfolios distinguishing between accumulation and decumulation client needs, with managed accounts playing an important part in this process, by providing transparent and robust investment solutions specifically designed to meet the challenges to investing during retirement (longevity, income, sequencing, downside protection, contribution, bequests, liquidity etc.).
However, managed account transparency is not the only advantage. While having the flexibility to include exchange traded funds (ETFs) and direct shares alongside traditional managed funds in the structure, investment decisions can be implemented equally across all clients in a timely manner through the advent of centrally managed portfolio decision-making.
In a traditional advice – investment implementation process, advisers would go through an annual review process with each client at different points during the year to implement the same investment decision. Through the application of managed accounts into an advice business, significant efficiency benefits are realised for both the client and advice business alike. This is something our clients appreciated in times of market turmoil, such as during the COVID-19 market ramifications in early 2020.
Managed accounts also have the benefit of client reporting being more transparent and helping managing compliance matters through the equal treatment of all clients. Leveraging professional managed account providers also enhances the governance framework around investment decisions.
As the investment space evolves over the next 12 months, advisers and their clients are increasingly seeking products that afford characteristics such as flexibility and transparency, with managed accounts offering both.
Steven Tang is head of consulting at Zenith Investment Partners.