The managed account market is dominated by small providers but big players are starting to throw money into the sector that experts have said is big enough for everyone, Janine Mace finds.
When it comes to managed accounts, this day has been a long time coming. For a decade or more the managed accounts cheer squad has been talking up the benefits of these structures and predicting they will break into the big time.
Finally, it seems their time has come.
With the big banks throwing serious resources at the managed account market and financial advisers and dealer groups increasingly embracing them, all the enthusiasm now seems justified.
HUB24 managing director, Andrew Alcock, said: “We are watching the managed accounts market reach its tipping point”.
Institute of Managed Account Professionals (IMAP) chair, Toby Potter, agreed as “the time is right for managed accounts”.
Their view is supported by the research. The Investment Trends ‘April 2017 Managed Account Report’, that surveyed 474 financial advisers, found a sharp lift in adoption of managed accounts during 2016/17, according to research director, Recep Peker.
“We have seen a continuing steady increase in the number of financial advisers recommending managed accounts to clients, with 26 per cent of financial advisers recommending them,” he said. This is up from only 16 per cent in 2012 and 22 per cent in 2016.
Follow the money
So, the big question is, why managed accounts and why now?
As always in the financial services market the answer is about where the money is going. Advisers are increasingly putting clients’ assets into managed accounts, so service providers of every stripe are keen to ensure they don’t miss out on their slice of the action.
Over the period 2012-2016, annual growth in the number of advisers recommending these products was flat at around one per cent to two per cent, but in 2016/17, interest took off with a four per cent growth in the number of advisers using them, according to Peker.
The number of advisers intending to use these structures is also on the rise.
“Our research shows 20 per cent of financial advisers expect to recommend managed accounts to clients in the future,” Peker noted.
“The industry is at the point where a quarter of financial advisers are currently using managed accounts and are sold on it, but interest is in the three quarters who are not using it.”
According to Peker, planners are increasingly seeing managed accounts as a whole-of-portfolio solution and that means there is potential for even stronger asset flows. In 2013, the average adviser was recommending managed accounts for only 10 per cent of the new clientmoney they were advising on, but by 2016/17 this had increased to 26 per cent.
“Increasingly advisers are saying in an ideal world, out of all client monies, they would like to put 70 per cent of all client assets and new business into these solutions. This situation has been in the making for a decade, but now it appears to be finally happening,” he said.
Advisory businesses under pressure
The obvious question of course, is why advisers are moving client assets into managed accounts right now.
From the adviser and licensee perspective, these structures have many attractions in an increasingly efficiency-driven environment. Advice businesses are eager to embrace any solution that can deliver improved productivity and competitiveness.
managedaccounts.com.au head of distribution and marketing, Tony Nejasmic, explained that advisers’ businesses were under the pump.
“This is an efficiency play for advisers. They can manage 500 clients without the administrative burden, which is very attractive in an environment where margins and fees are being squeezed,” he said.
Alcock agreed: “It’s a competitive market and managed accounts help market participants to compete better”.
Clients and licensees also benefit, according to Potter.
“Managed accounts deliver in spades for advisers in the efficiency area, while also helping clients. From a licensee perspective, they can also be confident that all their clients are getting what they want,” he said.
Many of the large dealer groups have already embraced the efficiencies provided by these types of structures.
“The biggest managed account programs are those run by substantial advice business like Shadforth, Centric and Perpetual Private Clients, as opposed to those run for sale to others,” Potter said.
Managed accounts also helped advisers demonstrate to clients the value they are adding.
“If independent non-aligned advisers have the ability to exercise more choice, it allows them to show clients how they are adding value,” Alcock explained.
“For advisers, these kinds of structures help them deepen client relationships and demonstrate why they are being paid and how they are getting better outcomes for clients.
Investment clarity and choice
The lack of transparency and direct asset ownership inherent in traditional managed funds is also helping boost the appeal of managed accounts.
“Some of the growth [in managed accounts] is organic and we are seeing very significant growth of that type, but it’s also due to advisers migrating existing client assets from a managed funds approach,” Potter said.
Transparency is now vital to clients and this is helping drive advisers into the arms of managed account providers.
One of the key drawbacks with traditional managed funds is that clients do not know what is in their portfolio, Nejasmic said. “With managed accounts there are no surprises, as they can see what they own.”
Alcock agreed that clarity was important to investors. “Customers are increasingly sophisticated and want to think carefully about their retirement and scrutinise what is going on,” he said.
“Managed accounts allow the ability to see what you are investing in at a greater level. With managed accounts you can engage more with financial advice and understand what you are investing in to reach your retirement goals.”
Technological innovation is helping by giving market participants more choice and flexibility.
“Managed accounts allow different industry participants to collaborate to see which have the best solution for their clients. For example, a licensee can pick the best asset manager and administration platform to offer solutions to clients, not just the traditional packaged managed funds,” Alcock noted.
A good managed account provider allows advisers to customise a portfolio so that if they want a particular investment manager, but do not want a particular stock they hold, it can be removed.
“Technology allows you to package up something with much more flexibility than was previously available to retail clients,” he said.
Slower times for platforms
Strong adviser interest in managed accounts is attractive, given the sluggish growth being experienced by traditional platforms. They have responded by making managed accounts more readily available.
“In 2006, there was only one platform through which advisers could access managed accounts,” Peker noted.
“In 2016 there were 12 platforms, so there is an increasing number of financial advisers that can access managed accounts on their preferred platform and that makes things so much easier.”
Potter sees this as a sensible response to a shifting market. “The platform market is not enjoying the growth of previous years and [adding managed accounts] is a classic product improvement strategy in a slowing market,” he said.
It also reflects the changing nature of the market.
“Traditionally the large players in the managed accounts market were high net worth private client providers, brokers or trust companies. Then you got the emergence of specialist providers who competed with platforms – such as managedaccounts.com.au, DNR Capital, and Implemented Portfolios – and now we are seeing platforms coming along to facilitate managed accounts. Mainstream platforms are making managed accounts a core part of platform functionality,” Potter explains.
He believed the financial dynamics of a post-Future of Financial Advice (FOFA) world were having an impact.
“FOFA led to the demise of platform rebates, so platform providers are strengthening their platform capabilities and are now charging for something that previously they gave away,” he said.
Introducing managed accounts to your platform was also one way to capture some of the huge pool of self-managed superannuation fund (SMSF) assets, Potter argued.
“The administration solutions provider, Class, published research on SMSF assets which noted only eight per cent to nine per cent of SMSF assets are on-platform, so a big proportion of financial assets in SMSFs are not on-platform and this is a big prize,” Potter said.
Attention from big players
The supply side of the equation is responding swiftly as advisers increasingly turn their sights towards managed accounts.
“Everyone is exploring this market at the moment. But the big guys have to play catch-up, as a big chunk of the money in the market is going to the smaller groups,” Nejasmic said.
Large-scale players like BT, Colonial First State (CFS), and Macquarie are throwing significant resources at the market, Potter noted.
“You are seeing mainstream platforms committing substantial platform capabilities to support managed accounts. They are putting a good deal of both development effort and marketing effort into it,” he said.
All this interest is likely to see some changes in how market-share is carved up, particularly given that the Investment Trends’ research found that the managed account market was currently dominated by a small number of providers.
“When advisers were asked which solutions they used, three providers were neck and neck: Praemium, HUB24 and MLC Wrap/Navigator,” Peker says.
“These three are the biggest in terms of the proportion of financial advisers using them and this is also a good indicator of future flows.”
However, some advisers indicated they intended to start using other solutions in the future, he noted.
“These were BT Panorama and CFS First Wrap, with HUB24 close behind. The BT distribution team has been very active in promoting Panorama and so it comes up a lot, but also CFS,” Peker said.
Nejasmic believes all the interest is good for the market as “they are spending more money and that is leading to greater awareness of managed accounts. The market is big enough for everyone”.
Looking to the future, questions linger over how the heavy-weights will approach the market.
“The big three or four players are looking at the market, but the question is what form their offering will take. It’s unlikely to be as discretionary as the offerings from smaller players,” he argued.
“The banks are looking at the mass market, but we are looking at niche markets, as specialist advisers want full discretion and more choice in what they can offer clients.”
Interest from asset managers
The burgeoning managed accounts market is also drawing the attention of international investment houses.
“Managed accounts are allowing international managers and those with good money management skills to enter the market. For them managed accounts are invaluable, as the barriers to entry are less than if they use a traditional managed funds structure,” Alcock noted.
By way of example he pointed to the availability of international asset managers like Alliance Bernstein, Franklin Templeton and Arnhem on the HUB24 platform – firms that were traditionally only available to institutional investors.
Potter agreed that money managers were eyeing off the market.
“There are going to be investment managers developing products for sale by licensees or advisers, and others selling portfolio construction or investment ideas such as DNR Capital, Morningstar, and Lonsec,” Potter said.
For Alcock, the arrival of new investment managers in the retail market was invaluable.
“It’s about time for the market to have new entrants, as it allows more competition and allows existing inefficiencies to be challenged,” he said.
Looking to the future
Although things appear rosy for the managed account sector, some divergence is likely.
“I believe there will be a vibrant market, but some providers will have an advantage in in terms of scale and technological expertise,” Potter said.
“There will be a role for small investment managers to come in and offer investment management services, but when it comes to the administration service itself, we are starting to see the benefits of scale.”
In terms of innovation, Nejasmic expected to see reporting and performance outputs to improve. “Advisers and clients will be able to see more detail. The big platforms will bring substance to the business in this area,” he said.
With no ‘killer product’ on the horizon, innovation in product features is likely to be steady rather than disruptive.
“We will see increasing flexibility and innovation around the basic structures, such as the inclusion of international currencies to managed accounts,” Alcock predicted.
Nejasmic agreed: “We will see a further rollout of international capabilities such as international managed funds, international bonds and international shares”.
Alcock was extremely confident about the future of the sector.
“I think the market has been treating it as something new, but this will change and managed accounts will become mainstream and the dominant way of investing at the retail level,” he said.