Recent data from IMAP and Milliman shows that while the managed accounts market grew by $5.38 billion in the six months to 30 June 2018 – up to $62.43 billion – the majority of this came from organic growth, rather than inflows.
The amount attributed to inflows ($2.99 billion) was lower than the $3.37 billion in the previous six-month period, one has to ask: will flows decrease further?
One key issue with certain managed accounts structures pertains to a wider concern about the industry: vertical integration. If an adviser is charging an extra investment management fee on top of the costs of the provision of advice, does this create an inherent conflict of interest? And if so, how can advisers use the scale and administrative benefits of managed accounts while minimising risks from a regulatory perspective, especially in light of the looming Royal Commission final report?
Defining your investment philosophy
Lisa McCallum, OneVue’s EGM platform services, says the first step is defining your investment philosophy. As discussed in our recent Thought Leaders series, Building a Better Business Model for Financial Advice, an investment philosophy can be explained as one’s “ethos of investing” – for example, whether long-term asset allocation is better than being tactical, or “understanding the ‘why’ behind putting your money in a portfolio and understanding why it’s a benefit.”
Defining and articulating this, McCallum says, requires “genuine work,” involving strategic partnerships, specific tools and comprehensive research.
Reducing conflict through separation of roles
Once this has been established, she continues, it’s crucial that the investment management piece is separate from the advice piece. “When we work with groups,” she explains, “we complete a review to ensure the investment decisions are separated.”
“We have had clients who had combined both functions using a MDA structure,” she says, “as they matured and were looking to create separately managed accounts (SMAs), and we advised them to work with a specialised consultant to work through the structure and separation of these functions within the group. This process enabled the group to professionalise their investment process and develop a value proposition for the planners delivering advice to their clients.
“There needs to be a clear divide between the work involved in an investment management solution and the work of giving advice: it’s two separate functions and two separate skill-bases.”
Understanding the regulatory landscape
McCallum adds, “We think that maybe ASIC is going to review to ensure that investments management fees are based on an investment service. What’s the justification for that? What is the role they’re performing as an investment manager?”
Reflecting on the idea that managed accounts won’t continue with the same momentum, McCallum says that while ASIC may likely have a greater focus on the sector, business owners and advisers need to consider in what situations issues may arise.
“I understand there may have been dealer groups or smaller advice businesses trying to be fund managers when they’re actually advisers,” she says, “but if you have a business where there’s an investment committee and asset consulting expertise, and that’s meaningfully separate from an advice operation, that’s a legitimate use of the managed account structure.”
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