Managed accounts allow your clients to tailor their portfolio to suit their personal circumstances, unlike popular international investment vehicles such as unit trusts and, more recently, exchanged-traded funds, where you take what you’re given.
Historically in Australia only institutions, high-net-worth clients (via private banks) and family offices have typically enjoyed the benefit of having direct ownership and control of their overseas shares with global managed accounts (GMAs). But with the recent arrival of more sophisticated offshore trading platforms, the opportunity is now open to the broader market.
The two most popular forms of GMAs are individually managed accounts (IMAs) and separately managed accounts (SMAs).
Global managed accounts may only be practical for your clients if your investment manager runs a concentrated portfolio – typically no more than 15 to 30 stocks in developed markets, such as the US and Europe or UK – with low turnover (less than 20 per cent per annum). For a global equity manager investing in, say, emerging markets, with a large number of holdings and high stock turnover, it’s very costly to replicate a portfolio in managed accounts due to high transaction and currency-management costs, and the frictional costs of operating in less liquid markets.
Individually managed accounts
Global IMAs offer a range of benefits for financial planning clients, such as giving them the option to screen out certain stocks that present social, environmental or governance concerns. Your clients can also dictate their currency exposure and transfer existing holdings into the managed account in specie or when exiting the structure (known as portability). This is a major advantage in avoiding the cost (tax and fees) of redeeming units from a pooled trust and then having to buy new units in another trust.
There are also tax advantages, as there is no embedded tax liability within a managed account structure. That means your client can manage their capital gains with personal reports covering all aspects of their beneficially held and individually traded portfolio.
Having agreed on the investment plan, the adviser can match the fees to the client’s needs so they can easily see what they’re paying for. Most global IMAs have a minimum application amount of around $2 million, as smaller amounts can be prohibitive from a structural, economic and operational perspective. You also need to make sure that the fund manager offering an IMA has the experience, systems and processes to run them safely for clients. Very few do.
Separately managed accounts
The other common type of global managed account is a global SMA. An SMA offered by you to your client also offers the benefit of combining direct beneficial share ownership with the oversight of a professional investment manager through a professional administrator. The administrator provides the ongoing administration (trading, settlement, reporting) and custody of the holdings. In addition, the SMA provider will deliver consolidated performance and tax reporting.
When examining the different SMA providers in the market, questions that need to be asked by you include:
- How effective is their trade execution ability?
- Can they facilitate hedging in the managed account?
- Can they facilitate the collection of foreign withholding tax?
- Are different fee structures able to be charged, eg. flat fee and performance fee?
It’s critical that you make an assessment of the SMA administrator’s reach and experience trading on different exchanges throughout the world. Your assessment can make a significant difference to the cost and performance of your client’s managed account over time.
Benefits of managed accounts
The financial press is producing plenty of content explaining the benefits of managed accounts, and we’re already witnessing growing number of financial advisers offering Australian equity-based managed accounts to their clients.
But advisers wishing to create multi-asset portfolios with direct ownership and full transparency will need to offer global equity mandates alongside other asset classes.
With the recent entry of more sophisticated offshore trading platforms in Australia, the ability for financial advisers to offer their clients direct ownership of their overseas shares is on the rise.
However, you need to carefully assess whether you are offering your clients a valuable and cost-effective outcome.
