The managed accounts space is waiting with ‘bated breath’ over the conclusion over an investigation by the Australian Securities and Investments Commission (ASIC) into the growing sector.
Last year, it was announced ASIC would be carrying out an ‘information gathering’ exercise to understand the sector and how it works. It is now due to issue a subsequent paper on the operation of managed account portfolios including where an advice licencee is involved in formulating the investment approach.
The body said it was ‘carrying out information gathering on harms, risk and regulation of platform and managed discretionary accounts (MDAs) and considering necessary changes to regulatory settings’.
An MDA includes separately managed accounts, managed accounts or managed discretionary portfolio services. Within this structure, the manager is given responsibility to manage a portfolio according to prescribed guidelines and the service usually includes administration, investment management and financial advice.
Their appeal lies in the fact investors may not have the time or skills to do this themselves while also giving them exposure to a wider range of asset classes. For advice businesses, they are a more efficient option and allow for lower administration costs and greater time saving.
Since coming into formation in the 1990s, assets held in MDAs have grown and have particularly grown sharply in recent years. According to figures for 30 June, 2019 from IMAP and Milliman, total funds under management (FUM) in managed accounts stood at $71 billion. This was an increase of $9 billion from the start of 2019 when FUM was at $62 billion.
This increase was divided between $4.4 billion from self-managed accounts (SMAs), $2.7 billion in MDAs and the remainder distributed between other types of models.
MDA products remained the most popular type at $29.2 billion but platform-based self-managed accounts were growing in popularity and catching up with MDAs at $25.5 billion in funds under management.
However, they were described as being a ‘blind spot’ for the regulator by former ASIC commissioner Greg Tanzer, who said ASIC was particularly interested in conflicts of interest between MDA providers and financial advisers and worried that MDAs did not always meet clients’ best interests.
As a result, ASIC sent questionnaires to a number of platforms, operators, licensees and providers to ensure a range of perspectives on the matter.
When the information was released in ASIC’s Corporate Plan, the Institute of Managed Account Professionals (IMAP) said the message was a ‘change in tone’ from the regulator.
IMAP chair, Toby Potter, said: “This is consistent with a more suspicious view of financial services providers and a more assertive regulatory stance”.
He said IMAP had submitted a number of papers to ASIC regarding issues such as the diversity of MDA models, the benefits for clients and the high standard of MDA operation and typical costs.
“We are waiting to see what ASIC has to say, they have been doing this information gathering exercise and we are waiting for the conclusion. They have been ensuring they have a clear understanding of the way managed accounts operate, the benefits they have and the process for managing conflicts of interest. It is a good thing they are looking into it, they want to make sure they understand how this system works,” Potter said.
“We have tried to find out if the exercise was driven by a specific instance of client loss that they were concerned about but I’m not aware of any instances within managed accounts.”
The potential problems concerning conflicts of interest came in five forms; advisers recommending their own in-house products, revenue via portfolio management fees, overtrading in order to charge more transaction fees, over-servicing of the portfolio and adopting a ‘one size fits all’ approach with multiple clients.
But a report by Colonial First State (CFS), which has over $10 billion in managed accounts, entitled 'Managed Accounts: Building Your Future Business' said owners of firms which used managed accounts were more confident than their marketplace peers that they were managing conflicts of interest appropriately, were monitoring and supervising their staff and had breach identification, assessment and reporting procedures (see chart 1).
Advisers using managed accounts were confident and optimistic about their practices’ growth potential and risk management capabilities and felt the use of managed accounts enabled their businesses to grow.
Ben Abell, head of institutional solutions at CFS, said: “We found advisers were surprised by how much of a positive impact managed accounts achieved. They report improved client engagement and communication as they can talk holistically rather than about individual stocks.
“They also reported improved investment outcomes which they attributed to being able to make changes quickly and being able to execute decisions quickly across all the relevant portfolios, rather than any individual investment ideas.”
James Mantella, head of managed investment products at Netwealth, said: “[The industry] expects to receive information from ASIC later this year. They did a lot of work with platforms and investment managers to understand the full focus of the sector. We are waiting with bated breath for the result.”
Asked whether the investigation could result in additional regulation for managed accounts, Mantella said he did not expect that to be the case.
“That is not ASIC’s intention, they want to ensure the support is stringent as they are new to these types of products and want to tighten their focus on client outcomes and fees. I don’t expect there will be any findings which will shock the industry. The industry has been calling for this for a long time to ensure consistency across platforms and to achieve better outcomes for clients.”
Dependant on ASIC’s findings, the industry was optimistic on the future of the managed account space with IMAP data estimating the industry could grow to $115 billion by 2020.
A study by HUB24 suggested trends in the space would be increased use of artificial intelligence and machine learning to capture and analyse data to improve client investment outcomes and enhance engagement between adviser and clients.
“The application of AI is in its infancy in the managed portfolio sector, but its potential is immense. However, employing AI effectively will require an explicit commitment by providers to invest the time and money to make it work effectively,” it said.
As well as this there would be customisation of client portfolios to allow far greater flexibility, group and individual tilts without additional complexity.
“While the number of players in the managed portfolios space may proliferate in coming years, not all will be created equal, and many offers have only the basic functionality available. Those that prosper, and support advisers and their clients best will be those with a proven technology track record, a proven ability to remain responsive to clients’ and advisers’ needs, and a constant drive to deliver new features and solutions,” it said.
Abell said tailoring was becoming increasingly important and would be helped by improvements in technology.
“We think tailoring is becoming increasingly important and the improvements in technology are an important driver of this, having that ability to access a broader range of assets and customise portfolios.
“Simplification will also be a key theme and this is something we are spending time on at CFS, it is one of the areas where there is the greatest potential for improvements and making managed accounts easier for a wider range of people to access.”
When it came to types of products, Jodie Hampshire, managing director at Russell Investments, said Russell had introduced a range of active managed accounts which she expected would become a more common option in the future.
“When we spoke with advisers they said they only had two options of being very active at a high cost or being very passive at a low cost so they wanted something in the middle. So we launched four risk profiles which all have an active dynamic multi-asset diversified fund plus Australian equities plus ETFs [exchange traded funds] so they end up with a well-rounded account that combines active and passive management. We think this is a pragmatic way to approach asset allocation.”
“[In the future] I think we will see a trend towards personalisation and people using managed accounts to apply their individual world view such as a portfolio with a low carbon tilt.
“I can also imagine we will see more unbundling where the investor is able to view their full portfolio.”
This was confirmed by Abell who said transparency and greater visibility was a key desire for CFS clients and a reason why they opted for managed accounts in the first place.