Managed discretionary accounts will overtake separately managed accounts in future in the IFA market as managed accounts move beyond operational efficiency as being the sole driver of their appeal for financial advisers.
This is the view of Stephen Romic, principal and head of research at DFS Portfolio Solutions, which has been running managed accounts since 2008, initially for the firm’s own advice practice and then for IFAs. It currently has about $300 million for IFAs.
Romic was speaking at a seminar this week held by the Institute of Managed Account Providers (IMAP) and sponsored by Macquarie. The seminar took place in Sydney, Melbourne, Brisbane and Perth, which were linked by video conferencing, thanks to Macquarie.
Romic said that while operational efficiency usually anchored the move away from funds (unit trusts) to managed accounts there were several other advantages which became apparent. From an investment perspective, these included:
- the evolution from a product-based investment approach to a more genuine portfolio solution
- greater risk diversification potential
- the consideration of behavioural biases among investors, and
- size advantage, because managed accounts are much smaller than most funds they tended not to move the market when trading.
Romic said that, in the future, there would be more power in the hands of the investor. “They will be able to implement and benchmark their own portfolios. Technology will allow investors to hold their advisers to account,” he said. “Product-based approaches will come under pressure.”
The next generation of managed accounts would favour MDAs over SMAs, he said, for several reasons, including:
- they have an unbundled service
- they had scalable automation, and
- they had greater pricing power through mandates.
But generation differentiation and client engagement remained the key to success, he said.
“This may also blur the lines between retail and institutional markets,” he said. “In the US, some MDA providers have $15 billion or more under management.”
Managed accounts tended to be more concentrated than funds, according to Joel Bloomer, Morningstar’s head of discretionary equity strategies for Asia Pacific.
He told the seminar that the average equity mandate for an SMA had 25 positions, but the average for funds, based on the 150-odd funds in Morningstar Australia’s large blended equity universe was 75.
“The average for funds is skewed, though, because it includes passive funds, so the median is lower, between 45-50.”
He said funds typically had a long tail of portfolio holdings. Morningstar Investment Management runs 12-13 SMAs across platforms, totalling about 200 portfolios.
“Our operations and investment management teams collaborate with platforms to minimise market impact and remain compliant. We do pre-trade check, trade and post-trade checks… We have lower turnover [than funds].”
Toby Potter, the founder and chair of IMAP, said his organisation looked to cover each of the four “parts” in managed accounts – legal structure, advice, technology and investments.
The next event was the ‘Investech’ conference which would take place on December 5, at which IBM would talk about how technology could improve the operations of service companies.
In March, next year, IMAP would run an adviser roadshow, which would address the changes in the advice industry. In July, it would run its portfolio management conference again.