Investment executives from some of the country’s largest advice groups have agreed that the optimal amount of funds under management for a viable and profitable managed accounts program at that level starts at $1 billion.
Speaking on a live panel at the IMAP Portfolio Conference in Darling Harbour, Clearview CIO Justin McLaughlin and Shaw & Partners CIO Martin Crabb were joined by AMP senior manager of listed securities Paul Saliba to discuss the challenges of building managed accounts for larger advice businesses.
Asked by session host, Evergreen Consultants’ Angela Ashton, how much funds under management (FUM) firms of this size require to make managed accounts viable, the panel came to a quick consensus.
“I think the model is north of $1 billion,” McLaughlin said. “You have to get into that sort of range to support a team and everything else.”
Large advice firms can run managed account programs with less FUM but they would be looking to make up margin elsewhere, McLaughlin added.
The investment research and administration that goes into running a managed accounts program for a large cohort necessitates a fair amount of capital being invested, Saliba explained.
“In a large shop if you’re not getting significant flows and you don’t have a sizeable chunk of money then you’re putting a lot of effort in reporting and the analytics and such, going back to the [responsible entity] each year with all the data they require and the third-party ratings.”
Smaller firms can make managed accounts viable without scale, Saliba noted, but “certainly as a large business you need a large amount of FUM”.
“About $1 billion is probably the magic number,” said Crabb. “If you want to go it alone you can get away with less than that, but as Paul said, bigger is better.”
AMP has under 1500 advisers and remains one of the largest networks in the country, though the cohort is shrinking rapidly as the firm slims down its wealth arm.
In 2020 Shaw & Partners was listed as the 16th largest licensee owner in the country with 240 advisers, while Clearview sat in the 18th spot with 234.
Getting it right
The panel wrestled with the question of how many models are right for the firm, the advisers and their clients.
While none of the panellists had a set formula for the optimal number of models per risk profile and platform, each was content to reveal their current arrangement.
“We’ve got a set of five accumulation models and a set of five income-oriented retirement portfolios,” AMP’s Saliba said. “We’ve also got two specific retirement portfolios and there’s a set of five core and satellite portfolios.”
Clearview runs “23 or 24” models, McLaughlin said, while Shaw & Partners had 12 according to Crabb.
“It comes back to how active your asset allocation is,” Crabb said. “Just having the models there is one thing, but the more models you have the more work it is [because] you’ve got to have a team of people rebalancing them all the time.”
The amount of platforms employed is another variable to consider when it comes to the quantum of models used, the panel agreed.
Shaw and Partners only use one platform, Crabb said, which made things easy, but they anticipated more work as they brought further platforms into use.
AMP primarily used its own MyNorth and North platforms, Saliba said, but allowed advisers to request “one-off” exceptions to use platforms outside the group’s approved product list.
According to McLaughlin – who said Clearview used “a couple” of platforms – more models is not always a good thing.
“There’s this wonderful idea of scaling your product across all platforms but that’s a little bit harder than it looks,” he said. “You’ve got different trustees with different rules around asset allocation and then you’ve got to have volume to justify the cost of establishing it, so I think there’s a question as to how prolific these models are going to be across platforms.”
Marks of success
There was broad consensus across the panel that the success of a managed accounts program can primarily be measured against its ability to help advisers satisfy the goals of their clients.
Widespread use is another metric firms can use, Saliba reckons.
“Success is clearly if they’re broadly adopted, if you’re building solutions that get to the middle of your adviser distribution and your client base.”
While these are primary measures of success, Clearview’s McLaughlin added, a secondary one is the added efficiency managed accounts bring at a practice level. With less product provider subsidies in the advice ecosystem these efficiencies are even more crucial to commercial viability.
“We’ve moved from a world of subsidies to a world of no subsidies… and advice fees have gone up a lot,’ he said. “Efficiency has really come to the forefront of how they run their practices, so one of the additional success factors managed accounts can bring to the table for planners is really how they operate their practices.”