Even for the most astute investors and SMSF trustees, acronyms and naming conventions in the investment industry can be confusing. Many investors are aware of the difference between direct investing (usually into equities) or investing into a managed fund, where there is an investment expert managing a portfolio of investments for your clients and others.
Today, the use of managed accounts as an investment option is increasing, and these are then broken down into different types (and acronyms), such as separately managed accounts (SMAs) and individually managed accounts (IMAs). So what is a managed account, and should you consider one for your client's SMSF investments?
In very simple terms, a managed account is like a managed fund, but without the “trust” structure that managed funds have. There is the benefit of an expert manager looking after a person’s portfolio and choosing particular investments at a point in time based on their experience and analysis of market opportunities.
While an investor will purchase units in a managed fund, in a managed account an investor will buy into the underlying investments. This means the investor (an individual or an SMSF) retains ownership (for tax purposes) of the underlying investments, their tax position (for capital gains tax (CGT) calculations) is based on their circumstances (such as how long have they been invested) for CGT discounting purposes, and dividends and associated franking credits flow through to the investor.
This can provide two significant benefits to an investor. The first is around CGT calculations. Depending on when you invest in a managed fund, and market movements, some investors have been caught out by a fund manager appropriately distributing income to unit-holders that contain a capital gain distribution for events during a particular year, but the investment into the managed fund itself may have fallen in value during the year due to market movements. It can give an anomalous result in that as an investor, your client is taxed on gains, whilst their investment has suffered a loss. It is an unfortunate outcome that you have no real ability to control, as it has happened purely based on circumstances rather than anyone’s fault. With a managed account, this risk is removed as you and your clients have greater transparency over outcomes.
Second, without the overlying trust structure of a managed fund, when distributions (such as dividends) are paid from an underlying investment, they will flow though to your client as the investor, rather than accumulating with the fund manager until such time as they choose to distribute any earnings.
In an SMSF environment, managed accounts can be beneficial because of this ownership structure and flexibility it provides. It could, if appropriate, allow you to segregate some of the underlying investments between different members, or between investments held in accumulation or pension phase. Of course, you can keep it all much simpler (as many SMSFs do) and just have the managed account investment pooled with all your client's other investments and allocated on a proportional basis.
As always though, it pays to spend some time doing a bit of research before looking to utilise a managed account strategy within your client's SMSF. Different providers will charge different fees - some may be more, and some may be less than the equivalent type of managed fund investment. There may also be differences in the initial amounts you need to have available to invest. Whilst the level of initial investment has come down dramatically from many years ago, it is still typically higher than that required to invest in a managed fund. And of course, if your client is investing via their SMSF, you need to ensure that the investment aligns with the SMSF’s documented investment strategy.
Bryan Ashenden is Head of Financial Literacy and Advocacy at BT Financial Group.
Information current as at February 2018. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to your personal objectives, financial situation and needs having regard to these factors before acting on it. This information provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material. Any super law considerations or comments outlined above are general statements only, based on an interpretation of the current super laws, and do not constitute legal advice. This publication has been prepared by BT Financial Group, a division of Westpac Banking Corporation ABN 33 007 457 141 AFSL & Australian credit licence 233714.