Wrap platforms were originally built by the institutions as a managed fund supermarket. But as the demands of advisers and investors evolved, platforms were pushed to offer greater functionality, including the ability to trade equities. Their shortcomings were exposed as a result.
Now most are enabling managed portfolios in the form of separately managed accounts (SMAs), but these have some of the same shortcomings.
In many cases, the same rudimentary technology and simplified mass-market approach used to run a wrap is being used to manage SMAs, even though transforming a wrap to deliver SMAs is a major change which requires different competencies and technology.
While investors and advisers have access to a new feature, they should question the investment case for investing in an SMA where the provider can’t control when they buy or sell a stock and at what price, nor do they have access to all corporate events.
What about the new generation platforms?
The weaknesses of the incumbent wraps, and the frustration of advisers, created an opportunity for boutique platform providers to emerge.
All now enable the management and distribution of SMAs, driven by a growing recognition of managed accounts as a superior mechanism to manage client portfolios and deliver improved client outcomes.
However, there’s little differentiating many of the boutique platforms from the incumbent wraps when it comes to the delivery of SMAs.
They’re still built on simplistic rebalance technology and supported by legal structures that limit the ability of managers to actually manage client portfolios.
SMAs may be a compelling solution for the mass market and investors looking for a transparent managed fund outcome but they’ll only disappoint those who want a customised managed portfolio.
Advisers have long acknowledged that wealthy, sophisticated self-managed super fund investors don’t want their retirement savings managed with a mass-market approach. They typically want a customised portfolio and the ability for their chosen and trusted adviser or investment manager to use their discretion and skill to decide when to invest, what prices to pay on entry and exit, and the option of participating in all corporate actions, including initial public offerings and placements, to achieve the best possible outcome. They don’t want to settle for the average market price for the day organised by an SMA administration provider.
They also want to invest in a variety of asset types not just large-cap equities. That may include small caps, micro caps, less-liquid hybrids, OTC bonds and a broad range of managed investment schemes.
What should advisers consider?
Sophisticated clients are effectively looking for their portfolio to be managed like a small, discrete investment mandate, not a mass-market portfolio, and this is no longer a “Neverland” concept.
There are advisory firms advising on tens of millions of dollars and replicating the mandate approach and pricing of the institutional market by outsourcing investment management to quality managers. Under such arrangements, advisers have the discretion to terminate and replace underperforming managers.
This puts the balance of power back in the hands of the advisory firm, not the platform provider.
For advisers who specialise in helping sophisticated high-net-wealth investors manage, protect and grow their wealth, an SMA solution may not be a genuine option.
Fortunately, not all managed account providers are built around legal structures that force a mass-market approach or limit the ability of investment managers to manage client portfolios.
More than just a fancy front-end
A managed account is an investment management solution above all else. While a fancy front-end interface may appeal to advisers and investors, it won’t drive improved investment outcomes, which is ultimately what matters most to the client and what advisers are accountable for overseeing the delivery of.
While it may seem easier for a practice to settle for SMAs via an incumbent platform provider, it’s not a viable long-term solution if the incumbent provider delivers sub-optimal investment outcomes.
Unfortunately, yesterday’s solutions are tomorrow’s problems, and with the range of managed account options ever increasing , a growing number of advisers will find their clients stuck in solutions that are built on flawed investment principles when a little bit of homework can ensure there is no reason for that to be the case.
