The corporate regulator has started paying extra attention to possible areas of conflict within managed accounts, report financial services lawyers, with firms that make predetermined decisions to put clients into in-house model portfolios and those that charge managed account fees under increased scrutiny.
While vertically integration remains in play for the advice industry, lawyers believe associated practices within managed accounts are attracting a heightened level of attention from the regulator that needs to be mitigated by extra vigilance around compliance.
Speaking on a IMAP webinar on Wednesday, The Fold Legal partner Simon Carrodus said practices need to be aware of the regulator’s increased focused on managed accounts.
“It’s already started and it’s not going away anytime soon – ASIC will be applying much more scrutiny to in-house products, including managed accounts,” he said.
According to Minter Ellison partner Richard Batten the increased interest from ASIC in managed accounts is a reflection of how popular, and ubiquitous, the structures have become.
“ASIC is certainly getting more interested in how these products and structures are being used,” he says, adding that the regulator’s focus sharpens when the products offered are in-house.
“There is an inherent potential conflict where you’re effectively advising into your own product as opposed to someone else’s,” Batten continues. “We’re getting a lot more enquiries from advisers and licensees in that area, around the structuring of those sorts of offers and making sure they’re appropriately compliant.”
ASIC’s interest in best interest duty is also heightened when the client is being charged a managed account fee.
“We don’t have any direct regulation on the amount or nature of fees charged under that type of fee arrangment,” Batten says. “But if it’s ultimately benefitting the firm there is much greater potential for scrutiny.”
MDA project on hold
ASIC remains keen to get a better handle on the managed account sector.
In March 2020 ASIC suspended its managed discretionary accounts project due to the pandemic after looking into the sector for 18 months.
At the time, ASIC’s senior executive leader of investment managers, Rhys Bollen, said the regulator served notices under its compulsory information powers to nine platform operators, seven managed account providers and two dealer groups.
Today, an ASIC spokesperson said the project remains on hold due to the impracticality of starting again during lockdown and with competing priorities.
No decision has been made to reopen the project, but this may change as the country emerges from lockdowns.
Making it work
Despite the regulator’s attention, Carrodus said advisers are “completely capable” of satisfying their compliance requirements around managed accounts if they keep a few of the fundamental compliance principles in mind.
The first is to make a clear and documented effort to match specific client preferences to product features.
“You want to explain how the managed account will satisfy the client’s needs, objectives and preferences… why the managed account is likely to leave the client in a better position versus the current position, and the trade-offs if there are any trade-offs.”
Avoid cookie-cutter recommendations and include a summary of alternative strategies, he advised, especially if recommending in-house products.
“If the recommended managed account is in-house we think it’s absolutely necessary to show an external one so you show the current investment solution, recommended in-house managed account [and] external managed account at the very least,” Carrodus said.
“The adviser doesn’t have to investigate every single managed account on the market,” he continued. “And of course they can rely on research from the licensee or from external research houses.”
In recording the features of the managed account structure, he said, be sure to link them to the client’s preferences instead of listing them like a PDS.
Another hallmark of bad managed account compliance is predetermined advice, he warned.
“When advisers say ‘I’m putting all my clients into managed accounts’, we need to stop right there,” he said. “It’s predetermined advice, isn’t it?
“If you follow a robust advice process with 100 clients and 83 of them end up in your managed account, so be it,” Carrodus continued. “A lot of them will probably end up there but you can’t put the cart before the horse.”