Advisers know well the time-crunching burden of the Record of Advice (ROA), which
can tie up vital time for the tiniest tweak of a client’s investment portfolio.
But more are turning to managed accounts (MA) to ease the regulatory load by accessing a back-office platform that can implement changes within 48 hours without the need
for an ROA.
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“Previously, you would have to send the ROA off and get a signature and then you have to ring the platform provider, who rings the managed fund and it goes through from there,” says Colonial First State distribution general manager Matt Harrison. “Right now, you could implement this [within] 48 hours.’’
Colonial First State is Australia’s leading managed account provider, with $5 billion under management and new products launching in the market this month. It will use the IRESS Portfolio System with its recently launched FirstWrap and FirstChoice MA products.
Westpac, Macquarie and smaller players netwealth and HUB24 all champion the platform, expected to grow to $60 billion in FUM by 2020, Harrison says.
“Managed accounts are not a new phenomenon; however, the scale to which we’re seeing them used today is the new thing, and licensees and advisers are turning their mind to them as they look at their back offices and processes,” he says.
Increased transparency for the client was also a benefit.
He said the biggest time burden for advisers was restructuring portfolios and sending out the ROA, leaving less time for strategy and client time.
“You wouldn’t be in this business if you didn’t believe in the value of advice,” Harrison says. “Whether that’s at different life stages and points or throughout your life ongoing, there’s this value of a life coach and financial coach.
“Advisers agree on a client’s goals and objectives and review annually but if changes need to be made, an ROA can take a couple of hours to build.
“If you remove that process and still give the same outcome expected by the client, can you imagine the efficiency? The positive of it is the scalability, so you free up your time. What are you going to do with those two hours, per client?”
For licensees running a number of different adviser arms, managed accounts increase the ability for risk oversight and control, he says.
“I do speak to a number of boutique licensees now that have a scale of $500 million or above and want this, because they’re looking for growth,” Harrison says. “They’re really good businesses, they’re trusted by their clients, they’ve got a good value proposition and now they say, ‘What next?’ And they’ve got that tipping point of scale; they can run model portfolios through managed account technology and it can suit their value proposition.
“There are a lot of people looking at it now, so it will go very quickly.”
While the United States has had a stronger MA market for longer, momentum was building in Australia, in line with an increased regulatory burden and better technology.
“When you mix those two together, where regulatory burden has increased and technology has improved, and providers have got better at positioning who they are and what they want to be, you’ve got the perfect world of getting the growth rates you have,” Harrison says.
‘It changes the landscape’
Tony Catt, founder of small Adelaide-based advisory Catapult Wealth, says MAs and separate managed accounts (SMAs) are on the cusp of where exchange traded funds were five or six years ago.
“We’ve seen the explosion in growth of ETFs. These new SMA products, in my opinion, are going to explode in growth in exactly the same fashion,” Catt says. “The financial planning community and wealth managers are looking for more efficiencies in their business, technology is allowing that efficiency and SMAs are taking advantage of this current technology that creates a great service for clients.
“It’s transparent, it’s effective from an investment management point of view, and it’s ticking a lot of boxes.”
The advantages over ETFs are transparency and beneficial ownership, he says. He also emphasises the business streamlining benefits.
“Where the regulatory stuff has been a burden is if you have an individually managed account, like the stockbroking fraternity, or if you have half a million dollars in an individually tailored portfolio, and I want to ring you because someone had a rights issue, takeover, corporate action or I want to make a change, I would have to do an ROA, which causes paperwork and inefficiencies.
“An SMA or MA removes the need to go through those hoops.”
The need for ROAs has been rising in line with the popularity of self-managed super funds and trends towards direct equity ownership, Catt explains.
“Practices like ours have grown on the back of investment philosophies of direct ownership and the ROA requirements are causing us an enormous amount of administration,” he says. “We didn’t have the ability to use SMAs or MAs 15 years ago. As these new products emerge, it changes the landscape. And as new tech emerges, it changes the landscape, too.
“It’s helpful because everyone’s trying to keep their costs down and efficiencies in their practices.
‘What the clients value is time’
IOOF group general manager, wealth management, Renato Mota, says the licensee uses managed accounts across its Shadforth Financial Group brand and Bridges, one of the subsidiaries in its financial advice stable.
“The role they play in both those networks and businesses is quite similar and it’s two-fold,” Mota explains. “Probably the most important from an adviser perspective is creating efficiencies. ROAs and the ability to re-weight portfolios and make portfolios in bulk without the necessity of the paperwork make advisers more efficient. What the clients value is time in front of the adviser and much of the administration is simply a means to an end to make sure we’re meeting the clients’ needs. If we can make that more efficient, I think we’re all better off.”
He says the other element for licensees is having greater confidence and robustness around the investment portfolios.
“If an event occurs and changes need to be made to a number of portfolios over a short period of time, the MA functionality ensures that you deal with everybody in bulk,” Mota says.
Demand for MAs has been growing strongly for three to four years but has been curtailed by companies needing to shift a business model to support an MA framework.
“Shadforth occurred quite a number of years ago and is the most mature model,” Mota says. “Bridges was in the past 12 months, so that’s a work in progress. But even in the [independent financial advice] space, they’re moving to this type of operating model.”
He says IOOF has an open-architecture model, which means it supports a range of different product providers with a view to creating a ‘best of breed’ solution.
The key to MA products is the technology or platform that supports them, he says.
“Every structure has its pros and cons, so I think it’s about making sure we’re putting our clients in the right structure for the right reason,” he says. But MAs aren’t for everyone and transaction activity can erode returns if the account balance is smaller, he cautions.
“If you’re dealing with small accounts or small allocations, transaction costs can accumulate. It’s certainly relevant for larger account balances and for those advisers who run quite
a common portfolio across their client types,” Mota says. “That ultimately depends on the licensee or the holder of the MA licence, and ensuring you have the right governance around the portfolio structure is quite important. There will be constraints on what you can or can’t invest.”
