Six questions to consider when implementing a managed account solution

8 minutes  
Date: 26 September 2017

Managed accounts can be an excellent solution for advice businesses wanting to increase administrative efficiencies and find better ways to engage with their clients, but like any 'all of business' solution they may not be right for all.

It all starts with an examination of your business

Managed accounts can be an excellent solution for advice businesses wanting to increase administrative efficiencies and find better ways to engage with their clients, but like any ‘all of business’ solution they may not be right for all.

And what we mean by ‘all of business’ is that a managed accounts solution can impact client engagement, investment processes, back office administration, technology and more.

To understand whether a managed account solution could be worth considering, Netwealth has put together this information guide to help you understand some of the considerations and risks of managed accounts.

At Netwealth, we think there are at least six areas of your business that need to be scrutinised before deciding whether a managed account solution is right for your practice. While we think these are the key areas, please be aware the list may not include all matters applicable to your business and we encourage you to seek information from a range of sources in making your decision.

Interestingly, these six areas may be relevant to any advice practice whether or not they decide to go down the managed account path or not.


1. What are your business objectives?

Start by asking what your key strategic business objectives are right now. These are the conversations that happen in the board room and involve looking at your business as a whole.

  • Do you want to improve the efficiency of your back office?
  • Are you currently focused too heavily on non-core capabilities which would be better outsourced so that you can spend more time with clients?
  • Is there a better way to achieve a more scalable and consistent offer to your clients?
  • Do you need to improve customer engagement?
  • Is it to achieve better client outcomes in general?
  • Is there an opportunity to rely more on professional investment managers who have similar investment philosophies and strategies to your own?

If you responded positively to a number of these questions, it could indicate that you are ready to investigate a managed accounts solution. Obviously there will be other ways to achieve some or more of these objectives, but the nature of managed accounts being a holistic ‘all of business’ solution means that you could potentially deal with many of these challenges at once.


2. What customers are best suited to managed accounts?

Another key consideration will be who are your clients and what are their investment attitudes and needs?

Managed account customers are often defined by characteristics that are largely attitudinal and not easily determined by life-stage or demographic. They can be high net wealth, SMSF trustees or millennials wanting to use their mobile phone to invest.

A key attitude that we expect to drive managed account adoption by clients is transparency. That is a client desire to have direct visibility of the underlying assets, and some ability to control the holdings. Another characteristic will be a desire to ‘outsource’ to experts, so they are not directly involved in strategic portfolio decisions but have some capacity to, if they wish, to smaller decisions. For example, an ethical investor who while they do not want full responsibility, may want to be able to exclude certain investments which are not ethical or that they have a particular aversion to.

To illustrate, Neal Dunne from Moore Stephens tells the story of one family office client whose usage of managed accounts allowed for a seamless transition to the next generation.

“By taking the mantle of investment decisions away from the father and replacing it with a managed accounts solution, we allowed the next generation to come in and say, ‘we know what the structure is, we know who the key investment managers are, and Dad doesn’t have to make all of the investment decisions anymore.’ Which means the children can get involved even if they don’t necessarily have their father’s in-depth financial experience.

“We’ve also been able to shift the relationship we have with the father from a very hands-on situation to one where he can step back and take a helicopter view, which empowers the next generation to take a more active role in the process.”

This was, Dunne adds, never going to work with a managed fund structure, because even though they can be useful, “the client had traditionally been involved in the buying and selling of investments so a move into a unit trust was just not going to happen. The client was used to full transparency of the assets he owned and control over certain aspects of tax, which a unit trust structure could just not offer.”

So managed account customers typically want to have a sense of control while acknowledging that they are not experts. They often want to have a connection with their investments rather than having a portfolio that lacks transparency due to the mechanics of the investment model.

Managed accounts: A business transformation solution

Better understand the different types of managed account structures that are available and their pros and cons

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3. What is your investment philosophy?

Your businesses investment philosophy is a key determination of whether a managed account solution is right or wrong for you. And so certainty and clarity about your investment philosophy is critical.

There are many questions that you need to resolve in developing and refining your investment philosophy and some of these include:

  • Is cost a key driver in selecting your clients’ investment portfolios?
  • What is your approach to passive vs. active management?
  • Do you believe in dynamic, strategic, or tactical asset allocation?
  • How do you define return and risk, and how do you benchmark them?
  • Do you have strategies that cannot be replicated by a managed account?
  • Have you got preferred investment managers and do they have a managed account offer?

Managed account solutions provide access to a broad range of investment models and managers offering a variety of strategies and options for you and your clients such as access to ASX 200 shares, small and mid-cap shares, Australian fixed interest, diversified portfolios and international models. And the options are growing.

The benefit of managed accounts today is that you do not have to be constrained by your investment beliefs. Modern managed account providers can offer you investment managers who provide mainstream options, boutique flavours, diversified strategies, different asset classes, exposure to both Australian and international markets, and so on.

With that said, managed accounts do not suit all investment philosophies and all types of clients. For example many clients with only a small amount of money to invest, may have a preference for a unitised investment solution such as a managed fund which provides them with professional management of their portfolio, but without the added complexity and detail inherent in managed accounts. However, as the industry and technology
matures more and more investment options are becoming available.

Another consideration is that regardless of your investment philosophy, if your practice does not have investment automation or at least investment discretion, implementation is time consuming, difficult and could potentially lead to noncompliance. Managed account solutions offer one way of achieving this automation.

Do you pick stocks for your clients?

If you are creating direct equity portfolios for your clients, you need to ask yourself whether the portfolio is really diversified and in the best interest of the client?

Research indicates that on average direct equity portfolios hold on average between 6 to 15 stocks. If you compare this to high-conviction managed funds or managed account portfolios that normally hold between 25-30 stocks, or even standard diversified managed fund holds that hold around 80 assets, there is an argument to suggest that the client does not have a diversified portfolio.

4. What structures should you consider?

There are many acronyms for all of the different structures that fall under the classification of a managed account. They include SMA, IMA, UMA, and MDA, among others.

Though the list is quite extensive, these are typically marketing terms which describe the various legal structures and functionalities within that particular managed account.

Each type of managed account has a slightly different structure that you should familiarise yourself with before deciding upon the right solution for your business. You will need to investigate the administrative requirements, legal consequences and cost implications of the different managed account types to ensure they align with your required outcomes.

Section 1 of this guide provides a description and the pros/cons of the different types of managed account structures available to you.

5. Buy, build or partner?

Depending on the size and internal investment expertise of your business, a key decision is whether you should utilise the managed account investment models available on your chosen platform's menu, assuming you have one.

Alternatively, you could look to establish your own private label managed account using internal resources and/or by outsourcing parts of the process?

These questions are largely dependent on your internal capabilities and skills, your access to capital and the speed in which you want to go to market with your offer. Setting up a private label takes time, experience and a financial commitment. It also takes dedication towards continued integration and roll out of managed accounts in your business, which can involve training staff and improving processes. It is not the ideal solution for every advice business.

Buying off the shelf

There are many platform providers, like Netwealth, that provide a public or retail menu of managed account portfolios, created and managed by professional investment managers.

If you do decide to invest in one or more of these for your clients – it is important to work through the process of evaluating the underlying managed account investment managers.

Given managed accounts are relatively new compared to the managed fund industry, you will come across investment managers who may seem to be boutique and operating quite differently to the big fund managers.

Although the provision of managed account research is relatively new, the availability and breadth of information is rapidly expanding as the market develops.

Advisers seeking additional information beyond the traditional investment research houses may refer to the several asset consultant groups reviewing and reporting on manager capability, investment strategy and risk  management.

  1. Who are the people who manage the money?
  2. What are the processes they use to manage money?
  3. What is the historic and potential future performance of the model (although as we know historic performance is not an indicator of future performance)?
  4. What is the price and does that represent value to your clients?

Building and partnering

If you are going to establish an in-house managed account solution some important considerations are:

  1. Will you do your asset allocation in-house? If not, who will you partner with to deliver this for you?
  2. Who will manage the governance and compliance of the solution?
  3. What partners, systems and/or technologies will you use for implementation? Do you want to do the trading in house, including all mechanics of rebalancing? If not, what platform can you partner with to meet your business requirements.

The considerations for a dealer group are even greater as they need to take into account the needs of many advice practices, not just the business model and processes of one.


06. How to choose your managed account solution provider?

To be truly beneficial to advisers and their clients, it is important that a managed account provider has a robust administration and support structure.

There are many behind-the-scenes procedures to make running managed accounts seem seamless for advice practices and dealer groups that are important to understand when you select a managed account technology provider.

Some questions to consider include:

  • Can your solution provider manage the calculations effectively?
  • What is their rebalancing engine like?
  • Do they consolidate and net trades?
  • Will the provider cater to the investments you want?
  • Can you blend different model managers?
  • Can the model be customised at the client level?

Efficient trading is also important. You can lose a lot of performance and efficiency by poor implementation. And there are obvious benefits to being able to tell a client exactly when a trade has been made and why.

The quality of reporting offered for your managed accounts is another point to consider when choosing a provider.