Commissioner Kenneth Hayne’s reluctance to recommend separation of product and advice in his final report makes it possible for potential conflicts in managed accounts to flourish, despite his assertions that all conflicts between duty and interest should be “eliminated, rather than managed”.
The commissioner – following ASIC’s lead – stopped short of recommending an end to vertically integrated practices in the final report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. He remained, he said, “unconvinced” that the benefits would outweigh the costs.
In doing so, he inadvertently cast aside concerns from many within the industry – and ASIC – that conflicts of interest lie within the provision of managed account services.
The scope of these conflicts was laid bare in an article Lonsec CIO Lukasz de Pourbaix published last week, titled “Managed accounts can’t fly under the regulatory radar”.
“While the royal commission has not mandated separation between product and advice, best-interest obligations and conflicted remuneration are certainly areas of focus,” de Pourbaix writes. “There will be increased scrutiny on the governance structures overseeing in-house managed portfolios, including the composition of the investment committees and the range of qualified and experienced professionals involved in investment decisions.”
De Pourbaix warns that increased focus on remuneration structures will come, especially with regards to fee rebates from fund managers and model management fees.
In an op-ed written for Professional Planner, The Fold Legal chief executive Claire Wivell Plater made clear that the majority of advisers have “genuine conviction” that managed accounts benefit clients.
“However, it must be remembered that managed account services benefit advisers as well,” she continues. “This means that advisers who offer managed account services must carefully manage the conflict of interest associated with in-house products.”
Tom Reddacliff, chief executive at Encore Advisory Group, is more pointed with his assessment of the potential problems with conflicts of interest in managed accounts.
“If you recommend a product and stand to make a profit from that product, how is that not conflicted remuneration?” Reddacliff asks.
Speaking to Professional Planner, de Pourbaix notes that firms running in-house managed account structures have another ethical question to ponder as well.
“If you have an in-house managed account structure and the advisers are recommending it to clients, what’s the mechanism to sack yourself if that solution isn’t in the best interests of the client?” he asks.
Not a central issue
Toby Potter, chief executive of the Institute of Managed Account Professionals, says licensees and advisers have every right to charge for their services in a way they see fit, as long as it’s within the law and satisfies best-interests duty.
“If the service that a client believes they want is the management of a portfolio, then there are a whole set of costs that are associated with that,” Potter says. Firms should be able to recoup the cost of providing in-house investment expertise or an outsourced investment committee, he argues.
“I mean, if you want to run a fund-of-funds, for example, there are a whole set of costs associated with selecting managers and paying them to do their jobs,” he notes. “And IMAP would argue that we shouldn’t quibble about the costs of equivalent services delivered in managed accounts.”
Potter also makes the point that observers shouldn’t get too prescriptive when it comes to the way licensees and their advisers apply managed account fees.
“Organisations provide a range of services and they develop pricing structures that comply with the law on one hand and are consistent with their business model on the other,” Potter says. “I don’t think it’s necessary or appropriate to try [to] argue that there’s one right pricing model.”
Indeed, one of the benefits of managed accounts – which are growing by 45 per cent, or $18 billion a year – is that this growth has led to a range of differing price models, which should, theoretically, provide clients with an abundance of choice.
“One of the things that we’re seeing as managed accounts develop is a range of pricing models; for example, where the costs of portfolio management are actually absorbed by the provision of financial advice,” Potter says. “We’re seeing the models where portfolio management and administration are actually embedded into a single fee. We’re seeing some models where it is strictly cost recovery and others where the services have been applied on strictly commercial terms.”
Potter doesn’t believe conflicts are a ticking timebomb for managed accounts. At any rate, he says, “it won’t become a central issue” because ASIC has already signalled that the problem is theirs to address.
“ASIC are already very sensitive to this issue,” he notes. “In fact, in the corporate plan that they announced last year, they announced a [review of] the transparency of managed accounts.”
Hayne concluded that a combination of increased technology and “a refreshed view by the regulator of conflicts management” would achieve the desired outcome when it comes to conflicts in managed accounts, Potter says.
“The point that was missing from his argument though,” he explains, “and managed accounts are, in fact, the archetypal example of this, is that it’s not practically possible to create a conflict-free advice model.”
