INDIVIDUALLY managed accounts (IMAs) lose their ability to provide value to investors as they become easier to access with lower up-front investment levels, according to Forrester senior analyst Jaime Punishill.
Punishill, who researches online financial services with the group in the US, has been in Australia for briefings with financial services groups and says that many IMAs offering access to investors at the minimum level of $50,000 usually hold around 50 core stocks, which equates to a $1,000 investment per stock.
However, given the prices of many leading stocks, investors would then only hold a handful of the stock, reducing the efficiency of costs associated with stock transactions.
“One such example in the US is General Electric, which is worth about $60 per share. Any investor holding that in a $50,000 IMA portfolio would only hold about 16 shares, which is a fairly small amount in terms of overall investments,” Punishill says.
“There is a huge debate going on in the US now over whether this is really a good position for investors to be in and there is a feeling that investors who do use IMAs access them from between $250,000 to $500,000.”
Punishill says a number of possible solutions would not work, such as dropping the number of stocks, because this would reduce diversification and purchasing cheaper stocks would harm investment returns.
However, he says a number of providers in the US market are working towards the provision of ‘block trades’, where particular stocks that may be held in small amounts inside IMAs are traded as one group, splitting the overall costs among many investors.
“The allure of these products for investors in the US is the same [as] in Australia — control over the investments and control over the taxable situation of the investments,” Punishill says.
He also says the reason IMAs are being carefully examined in the local market is because many Australian firms do not want to repeat the mistakes made by some of the large investment houses in the US when IMAs first appeared.
“Many of the larger groups ignored them and thought they would not take off and left them to the smaller players. Now some of those smaller players are large players and direct competitors for business,” he says.
“Local operators are fearful of that happening here and are keen to ensure they do not miss the boat.”
