Administration solutions: what lies ahead in the drive for efficiency and cost effectiveness?

A number of wrap platforms have recently released, or will release, SMA functionality. David Heather considers the impact of this development on existing managed account providers.

Demand for traditional wrap platforms is ailing, as investors and advisers look for more efficient and cost effective ways to invest in a broader universe of assets.

The direct investment trend has forced platform providers to boost their direct share functionality. A number have recently released, or announced plans to release, managed account functionality.

However, these enhancements to wrap functionality have sparked debate about the future sustainability of existing managed account providers, which some argue mainly compete on price.

The opportunity

The latest ATO data shows the SMSF sector has over 528,000 trustees and $558 billion under management. As at December 31, 2013, over 60 per cent of SMSF assets were held in Australian equities and cash. These statistics present a compelling reason for advisers who specialise in SMSFs to look beyond traditional platforms.

For starters, wraps were effectively created to provide advisers with access to wholesale managed funds. Essentially, wraps allowed clients to replace retail managed funds with lower priced wholesale funds. In exchange for a hefty platform administration fee, clients received a reduction in investment management fees and consolidated tax reporting. Furthermore, under the Investor Directed Portfolio Service (IDPS) regime, assets were held by a custodian.

However, a direct equities portfolio managed by an adviser via a wrap platform, does not deliver the same benefits to the client or adviser. A wrap platform’s value proposition comes back to an administration fee versus the services provided. For advisers, there are now a number of options available including:
• Inhouse administration built on readily available technology;
• Specialist administrators who do not need an AFSL, or IDPS authorisation in their AFSL, to • administer portfolios where assets are held in a client’s name;
• Stockbroker portfolio administration services; and
• Managed account providers who enable advisers to run portfolios with discretion

An increasing number of advisers are bringing administration inhouse, given no additional licensing is required to administer portfolios in a client’s own name. These advisers realise that the total cost of a wrap platform across a client base can be replaced through internal resources and some technology spend.

Discretion required

Many of these same advisers understand that they need the discretion to manage client portfolios directly. They’ve sought to obtain their own MDA authorisation in their AFSL or implement a solution through a specialist managed account provider.

Some managed account providers run menu driven model portfolios (typically called SMAs). These providers will ultimately end up looking similar to a wrap with the potential for convergence between the two. It’s still uncertain whether the wrap platforms will allow advisory firms to manage their own discretionary portfolios, with the platform taking responsibility for the firm’s mandates. Sophisticated managed account providers already facilitate this approach and will continue to have a compelling value proposition, notwithstanding they may or may not be priced sharper than wrap platforms.

Perhaps one of the important issues when deciding on whether to use a managed account provider is to understand a business’ requirements and to match these requirements to the various providers across the market.