First, a disclosure: this author’s professionally advised SMSF is largely invested in a managed discretionary account (MDA). And so, by definition, he has no personal beef with managed accounts, nor does he believe them to be fundamentally flawed.
To the contrary, the benefits to the adviser in terms of efficiency and sovereignty, and to the investor in terms of personalisation and responsiveness to markets, are well-evidenced and supported by research.
But those benefits do not absolve the booming $200 billion market of the need to be transparent and accountable as it matures. The reality seems to be that, despite the clear demand – with reportedly $1 in every $2 of new advice by a professional adviser flowing to a separately managed account (SMA) – the minutiae of this market is not well understood by its target audience.
Late last year, Professional Planner assembled 50 of the most influential asset consultants, researchers and platform executives – i.e. the individuals who in many cases actually control the construction of managed portfolios in Australia – for our annual Researcher Forum in the NSW Blue Mountains.
And it was telling that there was some confusion and disagreement on basic definitional differences between, for example, SMAs and MDAs and their congruent regulatory frameworks. If even this cohort of esteemed experts is detecting some greyness or opacity, how are advisers expected to have a clear picture of the benefits, features and risks associated with the various offers – let alone their clients?
There was consensus, however, on the fact there are significant and material differences between SMAs and MDAs from the perspective of liability and regulatory accountability, with the former effectively a more traditional financial product and the latter a financial service, with different duties and obligations attached.
To that end, the very concept of ‘managed accounts’ as some kind of congruent sub-sector is slightly misleading – particularly when many providers of these products/services seem to be adamant (at least behind closed doors if not in public marketing campaigns) that their chosen acronym is vastly superior to the others.
‘Clipping the ticket’
The regulator’s position on the various iterations of managed account has also been opaque. Around five years ago – following the damning testimony of Sam Henderson at the Hayne royal commission – ASIC’s focus on MDA providers was a top enforcement priority.
It commenced an investigation into the sector, and placed licence conditions on AMP preventing the wealth giant from engaging the practice (which it subsequently lifted last year).
Once the pandemic hit, ASIC suspended the project. This was misconstrued (or advantageously pounced upon) as the granting of a bill of clean health by the regulator.
But, as a trove of documents eventually released to Professional Planner under freedom of information laws confirmed, ASIC was on the cusp of an intervention into the market in early 2020 after its probe uncovered a number of serious concerns. These included “low barriers to entry in the MDA sector” and “clipping the ticket” by advisers constructing and recommending these services.
Industry whispers continue to suggest a cohort of advice practices (albeit hopefully a small one) are still charging something akin to, but not quite, an investment commission in the form of a managed portfolio ‘selector’s’ or ‘constructor’s’ fee.
Chinese walls
The conversation around potential conflicts of interest is not limited to MDAs. Professional Planner this week detailed the findings of its months-long investigation into Viridian Advisory, which found the leading boutique advice firm had been accused by aggrieved former staff of in-house product conflicts relating to its SMA business.
While many of the allegations were denied – and the motivation of the accusers as disgruntled former employees could be called into question – Viridian also revealed it had undertaken a major piece of work to establish Chinese walls between its advice and product manufacturing operations to remove conflicts.
Viridian deserves some credit for putting resources into a more contemporary and professional governance model, and for engaging transparently with Professional Planner’s inquiries. Nonetheless, there is an implicit admission that, at least at some point in the past, it operated a conflicted business model.
In Viridian’s case, the former employees conceded the firm did not have any kickbacks or explicit sales incentives in place, but argued they felt subject to influence stemming from the product-derived profits they received as shareholders of the firm.
It therefore presents an interesting ethical case study for any advice firms with a partnership model in place, where they are participating in any kind of product revenue other than a professional advice fee. And more often than not, the product involved is likely to be SMAs – which now account for 70 per cent of the overall managed account ecosystem.
The SMA sector is also plagued by opacity when it comes to standardisation and transparency (or lack thereof) of performance measurement. A number of recent initiatives aim to ameliorate this issue, including the SMA Reporting Standard – launched by Adviser Ratings in March and born out of the Professional Planner Researcher Forum – and attempts to apply proper research and ratings scrutiny of managed accounts by SQM and Portfolio Construction Forum.
These efforts are welcome and overdue. But they also underline that the ‘nothing to see here’ approach of some managed accounts providers, advocates and marketers has been insufficient given the concerns raised, including by the regulator.
The profession has come too far to risk anything short of world-class transparency and scrutiny.
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