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Will managed accounts survive the advice evolution?

27th September 2019
Will managed accounts survive the advice evolution?
Arnie Selvarajah
Chief Excutive Officer
Bell Direct

The use of managed accounts among financial advisers has been a growth story for many years. The pace of adoption has been rising since 2012, with 35% of advisers in 2019 indicating they have used and intend to continue using managed accounts[1].

As is frequently the case, the pendulum of change often swings past the point of equilibrium, so it’s timely to consider if this is the case for managed accounts. After being in favour for two decades, wraps and master trusts have fallen victim to technology advancements and increased scrutiny from advisers and clients. Particularly in volatile markets, advisers have uncovered the burden of time and the cost to clients of managing and selecting direct equities within wraps and master trusts. While suitable a few years ago, they are no longer viable in the current, new-age environment.

Similar risks plague the managed accounts market.

Technology advancements, the remaining questions around vertical integration, increased scrutiny from clients and the costs of running an advice practice are just a handful of challenges that the broader industry, and product providers, need to tackle.

So, in their current form, are managed accounts designed to outlast the evolution?

Transparency is key

Managed accounts first entered the market 20 years ago, so their rise in popularity has been a long time coming. As regulatory change has increased, and financial planning reforms introduced, advice businesses have faced a substantial hike in administration and compliance burdens.

Against this backdrop, the uptake in managed accounts makes sense – reduced compliance risks, increased portfolio management efficiency, scalability and automation, without sacrificing goals-based advice. However, where the industry has landed is cause for consideration.

Too many managed accounts solutions remain vertically integrated. Built with legacy and outdated technology, and continue to charge clients unnecessarily high fees, it’s these products which won’t survive the advice evolution.

Issues around vertical integration became vividly clear during the Royal Commission, so it is concerning to see some managed accounts products still falling into this category. Where you have groups creating portfolios, advising on those portfolios and allocating clients to those portfolios, there can be a serious lack of transparency.

To survive the advice evolution, advisers should be looking at providers with zero conflicts. In the US, there are already more and more advisers outsourcing the investment component of their work – resulting in a more prudent, independent and transparent model, and clients are benefitting.

Transparency is becoming increasingly relevant in building long-lasting relationships with clients. Greater emphasis is being placed on direct ownership of assets and client’s want the ability to view, control and provide input into portfolio decisions. Transparency is no longer a ‘nice to have’, but a ‘must have’ in this new era.

As the industry resets, advisers also need to consider where they can truly add value for clients. For most advisers, their time and skills are best spent thinking holistically about their clients’ entire wealth position, rather than focusing solely on investment execution – like selecting individual stocks.

Cost – weighing on everyone’s mind

For advisers and advice firms, there is pressure to charge less for advice services while balancing the increasing costs of regulation and compliance. For clients, it’s not only the cost of advice but the fear of fees-for-no-service.

With all parties so fee conscious, this is where appropriately priced managed accounts solutions with built-in buffers to avoid fees-for-no-service really make sense.

In a post-Royal Commission, post-FOFA world, the efficiencies created through use of managed accounts can reduce cost pressures and risks. Of the advisers already on the managed accounts bandwagon, 42% cite less administration effort and 41% see an increase in time to service new or existing clients[2]. At their most effective, managed accounts are an automated, scalable whole-of-portfolio solution suitable for any client on the wealth spectrum.

While the average price continues to sit above 120bps – usually excluding capped brokerage or RoA automation – the newer, more innovative solutions are coming in well under this (sometimes by up to half). It’s worth shopping around and paying close attention to the feature inclusions to ensure you, and your clients, are getting value for money.  

Managed accounts – here to stay?

Ultimately, the answer is yes – managed accounts are here to stay, but the offering, design and cost are crucial. Not every managed account product will survive the evolution and it’s crucial the industry recognises and acts upon this.  

 

Keep an eye out for our upcoming checklist on choosing a managed accounts solution or contact Desktop Broker for more information.  

 

[1] Investment Trends – February 2019 Managed Accounts Report

[2] Investment Trends – February 2019 Managed Accounts Report