Do SMAs detract from the individualisation of advice?

While SMAs may boost adviser efficiency, independent financial adviser Andrew Saikal-Skea suggests widespread use could leave some clients in a worse position while also reducing the individuality of their service.

As increased regulatory and compliance burdens coupled with an overwhelming demand for service has seen advisers eye opportunities to boost their efficiency, managed accounts have emerging as a key tool to help the profession reduce their administration burden when it comes to managing client portfolios.

However, speaking with Money Management, Saikal-Skea flagged concerns regarding the practical use of SMAs, particularly when it comes to advice firms creating their own SMAs. Namely, he argued that implementing an SMA across an entire book of clients could take away from the individuality of the service they receive.

“I do understand that - and it's the same for us - the vast majority of what we're doing is strategic work. The investment side is part of it but it's one part of the broader picture. A lot of advisers say, ‘We're still giving you all the value outside of this. It's just the investment piece isn't customised to you, it's our firm's view of an investment’,” Saikal-Skea said.

“For some for some people, that makes complete sense. But if you have a smaller number of comprehensive clients then a lot of the time, it's probably missing something that you can probably do better if you look at them on an individualised basis.”

Saikal-Skea suggested that implementing a balanced SMA, while the right option for some, could fail to address the unique risk or ESG considerations of each individual client. Although utilising a variety of different SMAs together could address some of these issues, Saikal-Skea said he was unsure whether that’s what was necessarily occurring on the ground.

“What some firms will do is they'll have a high-growth SMA, and then they'll have a defensive SMA, and then they'll blend them together so that the clients have their cash and fixed-interest and short-term and long-term investing,” he said.

A potential solution would see advisers decouple clients from the SMA before making a change that would negatively impact them, however, this could then detract from the argument that SMAs help boost efficiency.

On top of this, he said that while the SMAs may not be the best choice for all clients, the ability to argue that it works for most clients could become a “convenient lens” to justify placing clients in the SMA, particularly when the firm has spent a significant amount of money creating the portfolio.

“It's a big investment to do that. And I think that it potentially leads to conflicted advice, in some respects, because you spend the money on getting the SMA, therefore you want people to be in it rather than you then running custom portfolios.”

One area in particular where these portfolios could cause issues, Saikal-Skea explained, is when the SMA is rebalanced as selling off could trigger undesirable tax implications that leave clients in a worse position.

“If you had clients there that were about to retire and might have been about to be in pension phase where they've got 0 per cent capital gains tax, or you've got clients where they're high-income earners, and they might not want to be triggering tax right now because they've got a 47 per cent tax rate,” he explained.

“That's all now just happening to them because it's rebalanced, whereas what we would do with those clients is think more strategically and say, ‘Well, you're making contributions of 30, 50, 100 grand a year, we will just put those contributions into buying more of the Aussie shares, and then therefore will rebalance by bolstering that part of the portfolio.”

He said he is not outright against the use of these investment vehicles though, noting the efficiency benefits of running an SMA across a large book of clients allow the firm to implement changes faster.

“If you have a very large client base with lots of people and you've got hundreds of clients, it's almost impractical to be able to kind of respond to anything quickly if you've got too many clients.

“If you had a book of retirees and tax wasn't an issue then the SMAs could make more sense.”

Despite his concerns, Saikal-Skea said he still sees the value of SMAs in select circumstances, but they typically don’t meet his client’s needs.

“For me, the detractors and the reason we don't do that is tone, we don't look after so many people that we can't respond to things if we need to. Secondly, we really take a very long-term, predominantly passive view to investments.”

If he does come across a client who would suit an SMA, Saikal-Skea said he opts for an off-the-shelf SMA, but only when it makes sense for the client and it would be uneconomical to run a larger portfolio for that client, not because it would be a better option for his practice.