After twenty years in the market, managed accounts have finally come to the fore. But why now? In this paper, we explore why attitudes have shifted and how managed accounts are becoming a vital component of advice businesses.
The ‘industrialisation’ of managed account solutions across platforms promises to turbo-charge efficiencies for advice practices, delivering greater market share and a new level of service to a broader range of clients. By 2020, it’s predicted that managed accounts will total $60 billion in funds under administration and deliver around 75% of industry net flows.1 These numbers might seem ambitious, but the incredibly strong take up of managed accounts over recent years is testament to their growing power.
Licensees and financial advisers are increasingly embracing managed accounts. Of all new managed account flows advised in the last year, 42% went to licensee or practice-run models – well up from 35% in 2016.2 And 26% of recently surveyed advisers said they would recommend managed accounts, compared with 18% in 2014.2
Of course, managed accounts aren’t a new solution. Often touted as the ‘next big thing’, for years they have occupied only a small share of the investment market. So what’s behind this sudden increase in popularity, and how is it different this time?
There are three key factors that we can attribute to the recent growth of managed accounts:
- Wrap platforms prompted many more financial advisers to start using direct equities. While Wraps provided clear reporting and transactional efficiencies, managing a portfolio of direct equities still involves a greater time burden and level of systemisation that doesn’t necessarily fit within financial advisers’ value propositions. Managed accounts, operating at scale, solve these issues.
- Regulatory change continues at a rapid pace, leading to a substantial increase in the administration and compliance burden for advice businesses. Managed accounts provide a legal framework where advisers can not only execute portfolio changes on bulk, but also ease the advice documentation burden to deliver cost-effective, compliant solutions for clients.
- Combined with these changes is the significant contribution made by technology. With technology advancing, and IT development now much cheaper, it has become far easier to meet financial adviser demand and bring the benefits of managed accounts to investors.
Managed accounts are arguably the biggest development to hit platforms since their launch – a game changer for the platform market and the wealth management industry more broadly.
Why is it different this time?
A shift in value proposition means that managed accounts are now readily available for a broader audience of investor, in a vehicle that is profitable for advice practices.
A brief look at some features of the new managed accounts landscape will help set the scene for the road ahead.
Recent trends and events affecting the advice industry have seen a closer, more productive alignment between the interests of clients, advisers and licensees.
Providing advice is no longer about managing a product. It’s about engaging clients in a way that delivers to their unique objectives, without sacrificing the efficiency of the practice. Managed accounts help with the provision of goals-based advice and provide an efficient way for clients to access professional funds management along with transparency of assets and individual tax outcomes for clients.
Advisers increasingly see managed accounts as a whole-of-portfolio solution, with 33% of current users saying they would even prefer to use managed accounts for the entire client portfolio, up from 25% in 2016.2
Lower costs through scale and efficiency
Managed accounts aren’t competing with managed funds. They’re a business solution that offer more efficient and scalable portfolio management whether the portfolio includes managed funds or direct equities. The value is in the legal structure and the efficiencies this provides advice businesses in executing portfolio changes.
As part of building managed account solutions, licensees are realising reduced compliance risks in centralising portfolio management and using their scale to negotiate discounts with fund managers and drive down investment costs for end clients. In effect, they’re institutionalising the retail market, allocating to or away from fund managers on a wholesale basis.
The rise in popularity and availability of managed account solutions, along with ready access to education and training, is helping more advisers see the benefits for their practices. Insufficient product range is no longer the barrier it once was.
The perceived suitability of managed accounts continues to broaden, with more advisers saying they see these solutions as beneficial for both high net worth and lower balance clients.
Clients see a closer connection to their investment, and benefit from advice traditionally only available to high net worth portfolios. Financial advisers can offer more of their clients2:
- access to professional managers
- greater transparency over their investments
- diversification and investment flexibility
- direct ownership of shares
- cost and tax-effective services
- timely and consistent execution of portfolio changes.
In the broader context, accessibility and understanding is increasing the number of Australians who engage with financial advisers, forming a financially literate country and pushing the sector towards professional status.
What's the outlook?
Financial advisers and licensees can look forward to new momentum in the wealth management industry. Using managed accounts can boost the client experience and, in an environment where regulatory pressures are only increasing, also help advice businesses mitigate compliance risk and regulatory issues.
There is already a clear consensus among advisers who recommend managed accounts, agreeing that the tangible benefits include less time spent on administration and compliance, improved profitability and more engaged clients.2
It’s been spoken of as a revolution:1 managed accounts delivering higher flows and market share to more modern industry players, driven by advisers seeking to grow the equity value of their practices. We believe the managed accounts revolution is here to stay and will re-shape how advice in delivered in Australia for years to come.
1 Morgan Stanley (22 July 2016) ‘Disruptors: Australia Financials Managed Accounts – Evolution or Revolution?’.
2 Investment Trends (April 2017) ‘Planner Direct Equities & Managed Accounts Report’.
This document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) based on its understanding of current regulatory requirements and laws as at 26 September 2016. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), to the maximum extent permitted by law, no person including Colonial First State or any member of the Commonwealth Bank group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information. This document provides information for the adviser only and is not to be handed on to any investor. It does not take into account any person’s individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement (PDS) before making any recommendations to a client. Clients should read the PDS before making an investment decision and consider talking to a financial adviser. PDSs can be obtained from colonialfirststate.com.au or by calling 13 18 36.