As investment products have evolved, so too has the financial advice industry. From managed funds, to master trusts to wraps and, to managed accounts, each product iteration has seen technology strip away the excess structures which have incurred increased costs for advisers and clients.
Wraps and master trusts have had a good run over the last two decades. The ability to bundle a number of managed funds together into one product, with administrative ease, is a no-brainer.
However, as markets have become more volatile, and clients have embraced more direct equities, financial advisers have begun to uncover the burden of time and the cost to the client of managing and selecting direct equities within wraps and master trusts. When the annual cost and adviser service fee is taken into account, charges can exceed 4% per year[1] - beyond the threshold of many investors - the majority likely not using enough options within the platform to warrant the costs of the administrative structure.
It’s no wonder that in an age of ease and efficiency, wraps and master trusts are increasingly being superseded by investment options that offer greater transparency, portfolio customisation and individual tax management at a fraction of the cost.
Enter managed accounts
Much has been written about the ‘rise’ of managed accounts – but it’s been a long time coming. Managed accounts entered the market around 20 years ago, but it has only been in the last few years they have gained popularity. At 31 July 2017, managed accounts held a total of $47.7 billion in funds under management (FUM)[1], predicted to make up 75% of net industry inflows by 2020, and total $60 billion in FUM[2].
As regulatory change has increased, and financial planning reforms introduced, advice businesses have faced a substantial hike in administration and compliance burdens. The uptake in managed accounts makes sense – reduced compliance risks, increased portfolio management efficiency, scalability and automation, without sacrificing tailored goals-based advice.
Not only has advances in technology made managed accounts far cheaper and simpler for advisers to use, but their popularity has enabled licensees to negotiate discounts with product providers, driving down access costs.
Combine this with the ability to make faster decisions in how to deploy client funds, managed accounts mean that advisers have more time to grow their businesses, and go above and beyond for clients. As the industry knows, clients glean most value from the service provided and portfolio performance.
Better service means a better outcome
As cost has become a focal point for both clients and advisors, personal service and tailored advice has fallen to the wayside. Funds within wraps have been blindly channelled into low-cost ETFs over direct equities, usually without consideration of the overall outcome – a generalised approach that produces an “average” result.
Of course, cost is a focus, good value is critical, but above all personal service reigns.
Imagine then, a managed accounts solution which has been built as a progressive service model – servicing different types of clients, from those who prefer to make their own investment decisions to those who prefer to delegate to an investment professional.
Self-directed clients, with the knowledge and time to self-manage, or those who require low levels of complexity, can manage their own investment positions while also benefiting from the oversight, reporting and tax assistance of a financial adviser.
Clients who have more complex financial needs or who are less confident when it comes to managing their investments, are able to consult an adviser on investment decisions, as well as how they are tracking towards their personal financial goals.
It just makes sense.
Tapping into a broader audience
The low cost and low administrative burden that managed accounts offer has opened the advice market up to a wider group of potential investors, helping advisers to build much-needed scale.
A recent study[1] found one in three Australians feel financially stressed, with damaging effects on mental and physical health and social relationships. Despite that, around eight of out of ten people are not using a financial adviser.
While managed accounts will feed and shape the future of robo-advice offerings, automated advice will never entirely replace the need for personal service and tailored advice. However, for many, the current costs of face-to-face advice can be prohibitive but this is shifting.
The latest iteration of robo-advice in the United States incorporates an adviser or consultant to assist clients across the broad spectrum of needs. From guidance on how to use the advice platform, to understanding what to invest in, this shift represents an opportunity for advisers to embrace robo, prove value and not capitulate to the threat of technology.
In addition, the fact that managed accounts can now be used for the average investor, rather than just those who have high account balances, will make advice more accessible and more attractive to a broader range of clients across the wealth spectrum.
Now managed accounts are on the scene, they are here to stay and the IFA market are leading the way. For advisors and firms still unsure about making the switch, now is the time to seriously consider the benefits or be sorely left behind.
[1] Choice: Wraps and Master Trusts (9 March 2017) https://www.choice.com.au/money/financial-planning-and-investing/managed-funds-and-trusts/buying-guides/wraps-and-master-trusts
[2] Institute of Managed Account Professionals (IMAP) - FUM census 31 July 2017
[3] Morgan Stanley ‘Disruptor: Australia Financials Managed Accounts – Evolution or Revolution’ (22 July 2016).
[4] Core Data/ Financial Mindfulness Financial Stress Survey
This article was first published on Financial Standard website: www.financialstandard.com.au