SMAs provide most of the benefits of managed accounts, without the costs and additional investment in asset consultants, 3rd party MDA licensee arrangements, reams of paperwork, and compliance regimes, writes Seneca’s Luke Laretive.
There are 3 main types of managed account solutions in the market place, each with its unique set of positive and negative features.
Individually managed accounts (IMA) utilise a managed discretionary account (MDA) license and allow the authorised adviser to make changes to an investment portfolio without gaining prior authority from the client. They can be operated either on or off platform and are governed by an Investment Program, which acts like a private investment mandate and is attached to the Statement Of Advice.
While this delivers some efficiencies and can be implemented relatively quickly, advisers are still transacting on individual accounts, managing individual mandates and managing compliance and investments on a client-by-client basis.
IMAs are certainly a step in the right direction, yet the reality is that many of the client mandates are similar and administering all assets directly is unnecessarily complex – both for the client and the firm’s support team.
Rolling the key components of IMAs into MDA model portfolios, on an investment platform, solves some of these issues, focusing investment expertise into core product offerings and reducing much of the administration load.
However, the high friction onboarding process and ongoing paperwork associated with the MDA regulatory requirements has the potential to hinder practice growth and negatively impact profitability.
The ultimate in scalability
Separately managed account (SMA) portfolios on a platform administered Product Disclosure Statement (PDS) are the holy grail for those who have the scale and requisite experience to get through the platform’s rigorous investment vetting and satisfy the Responsible Entity’s (RE) requirements.
Being on PDS means onboarding is quick and simple, from both the clients and the advice practice’s perspective. There are a range of 3rd party software solutions and digital ID verification services which, if combined using API data feeds, can further streamline onboarding.
SMAs and a few bits of relatively cheap software offer licensees and advice businesses the ability to run at near-infinite scale. Clients receive the best possible investment portfolio, for their circumstances, at all times. Changes are made precisely at the same price, across the entirety of the client base, at the same time – regardless of portfolio balance or fees paid.
A cleverly designed SMA solution means individual portfolio rebalancing and contribution/withdrawal management is automated, leaving advisers primarily responsible for ensuring the client’s strategic asset allocation aligns with their goals and managing any satellite investments outside the SMA-framework.
The platform handles the administration inside the custodial environment, helping to keep staffing requirements low and focused on either engaging with existing clients or looking for new business.
For those interested in implementing a managed account solution, there are a few key decisions to make up front:
MDA or SMA?
MDA model portfolios, either on or off platform, are well-suited to some advice groups, particularly those that;
- Invest heavily in assets that are not on the platform investment menu.
- Need a large number of model portfolios – as there is no RE, this allows an Investment Committee to create as many model portfolios as they can sensibly manage.
To utilise MDAs a licensee requires an MDA-license variation from ASIC. Alternatively, one can engage a 3rd party MDA operator who can provide the practice with a turn-key solution which covers:
- Bespoke model portfolio suite design and ongoing investment management
- Guidance on deciding between on or off-platform MDA solution or pursuing an SMA approach
- MDA Investment Committee, governance, risk management and compliance processes to satisfy regulatory and/or RE requirements
- Implementing of the managed account solution – transition and onboarding templates, marketing collateral, guidance for adviser conversations etc. These are the small but important things that really determine implementation success.
Why choose SMAs?
White label SMAs gives firms most of the benefits of managed accounts, without the costs and additional investment in asset consultants, 3rd party MDA licensee arrangements, substantial increase in paperwork, and compliance regimes. All the taste, none of the calories.
The key benefit is simplicity; less paperwork and ‘cleaner’ implementation for those practices that don’t see the limitation of a RE-approved investment universe as an issue.
Advice groups can select from existing SMAs available on their preferred platform’s investment menu, and some choose to develop their own products.
A custom product suite requires significant scale and institutional grade, in-house investment capabilities. For many financial planning firms, a ‘white label’ solution is a fantastic middle ground. This offers the ability to leverage external investment products but under the adviser’s own customised PDS and branding.
From a marketing perspective, clients are invested in products that are only available through the adviser’s practice, which many see as a key differentiator and can be the foundation for an ongoing fee arrangement.