Investors and financial planners are increasingly turning to separately managed accounts (SMAs) to provide the benefits of professional management, but with the transparency and low cost of direct investments, according to new research from leading Australian private wealth manager JBWere.
A white paper released today by JBWere – ‘The evolution of SMAs: what do planners and investors really want?’ – reveals that investor use of SMAs has rapidly increased to the highest level on record, with 20% of financial planners now using SMAs as part of a client investment portfolio[1].
The prime drivers of this growth have been increasing investor education on financial products, combined with substantial administrative pressures faced by advisers, said JBWere Chief Investment Officer James Wright.
“Investors are increasingly choosing full control and transparency when it comes to their retirement portfolios in particular – with assets in the SMSF segment expected to more than triple to over $2 trillion by 2033, the funds involved are huge and growing rapidly,” said Mr Wright.
“Financial advisers are feeling the effect of this trend by spending more time monitoring and administering direct investments for clients, which combined with a new wave of regulation, is creating major commercial pressures on their businesses,” he said.
Despite increasing investor preferences for direct investments over managed funds, just under half (48%) of advisers were not interested in investing further in direct shares for their clients because of the administrative work involved in monitoring individual stocks[2]. For these advisers, SMAs presented a way for their clients to be invested in a transparent portfolio of equities, while outsourcing the management function to a professional, said Mr Wright.
“Stock selection, portfolio rebalancing, administration and after-market support are outsourced to the manager of the SMA, as well as responsibility for handling of corporate actions,” he said. “This means there is no need to provide clients with individual Statements of Advice (SoAs) every time the composition of the portfolio changes.”
While the SMSF sector currently holds just under a third ($193 billion) of its total assets in direct equities, a majority of planners actually believe these clients would be better off in SMAs. Given the tax efficiencies and convenience of outsourcing the management function, combined with a low overall management cost, SMAs were an ideal vehicle for investors holding equities through an SMSF, said Mr Wright.
“SMAs make a huge amount of sense for SMSF investors – they allow full transparency and ownership of stocks, without the investor buying into tax events and crystallising capital gains, and eliminating the hassle of having to monitor individual stocks on a daily basis,” said Mr Wright. “For those who may have opted out of managed funds in previous years due to cost considerations, the lower management fees should also appeal.”
Looking ahead, JBWere sees that the two key barriers to further growth in the SMA market would be education and availability. Despite a growing interest in the benefits SMAs offer, many advisers still felt they didn’t know enough about issues like the risks and tax advantages of SMAs to be able to answer more complex client questions.
“Both SMA providers and dealer groups must lead the charge in providing advisers a more comprehensive range of educational materials around the features and uses of SMAs in order for the market to achieve further growth,” said Mr Wright. “While the potential is there, supporting advisers to confidently explain SMAs to their clients will allow SMA inflows to be less inhibited than in previous years.”
“The addition of SMAs to more of the major dealer group platforms should also drive a surge in investor take-up,” Mr Wright concluded.
Source: JBWere
