Streamlining success: The benefits of managed accounts for financial advisers

Last year, Investment Trends reported that 53 per cent of 669 surveyed advisers were using managed accounts, and 18 per cent planned to do so in the near future, while only 23 per cent had no intention of using the product.

However, the number of advisers jumping on the managed account bandwagon has rapidly increased in the past year.

Due to the numerous benefits of managed accounts, the rate of usage among advisers is believed to have grown by as much as 20 per cent in the last year alone.

The driving factors behind this rapid uptake are heavy regulation and compliance in the financial advice industry. Namely, advisers are increasingly using managed accounts to overcome the challenges facing the industry.

BT Panorama and Praemium both reported increases in managed account usage in July, with a recent report by Praemium showing that firms using managed accounts for over three years achieved 79 per cent more profit per owner than firms not using them.

Other than the ease of use, within a compliance-heavy environment, advisers are often constrained by time — a finite resource for the rapidly dwindling industry.

But they’re also at the mercy of increasingly digitally savvy clients who want a greater degree of personalisation and insight into their investments.

Starting with their risk mitigation appeal, we take a look at several of the key benefits of managed accounts with the help of three industry professionals.

Managing risk

Martin Morris, chief distribution officer at Praemium, spoke to ifa about the benefits of managed accounts as a core risk mitigation solution. By outsourcing the burdensome task of portfolio management to professional investment managers, advisers are able to step away and focus their valuable time on strategic advice giving.

“Professional investment houses are better resourced, have enhanced skills and experience in portfolio management, and can provide a focused value proposition,” says Mr Morris.

Managed accounts, especially diversified models, manage portfolios daily to a risk or goals-based outcome, reducing the risk of portfolio misalignment. All investors receive prompt and fair treatment, and any portfolio changes are applied to all investors at the same time, minimising the risk of market timing delays.

“Platforms can rebalance managed account portfolios daily, which helps to minimise the effects of adverse market conditions and ensure the portfolio can take advantage of market opportunity quickly and easily for all investors. Reducing the downside and upside risk of advisers having to manage individual portfolios,” Mr Morris explains.

“The removal of ROAs for each investment decision or change means that any portfolio change is applied to all investors at the same time in a prompt manner, reducing the risk of marketing timing delays and ensures all investors are treated fairly,” he adds.

John Burton, head of sales at Lonsec, also spoke to ifa about the risk mitigation benefits of managed accounts.

He described them as “a vital risk mitigation strategy” due to the immediacy of implementation they offer. With managed accounts, changes can be executed immediately, rather than being delayed by administrative lag.

“This allows for quick adjustment of the portfolio according to market conditions for all clients, which can help mitigate risk,” says Mr Burton. He also noted that managed accounts provide investors with a broad range of investments, regular monitoring, and access to institutional-grade research and analysis, contributing to mitigating risk and potentially improving overall returns.

Brett Mennie, head of managed portfolios at HUB24, says managed portfolios offer threefold risk management benefits. They minimise delay in implementing portfolio changes, provide access to investment expertise at scale, and help advisers tailor portfolios to meet individual client needs.

“Through automation and the support of portfolio managers, changes and rebalances are implemented in real-time, reducing human error often found in manual processes,” says Mr Mennie.

This leads into the time-saving appeal of managed accounts. 

Time proof: Managed accounts drive efficiency

Managed accounts have seen impressive growth in a challenging market environment, thanks to the numerous business efficiencies they offer.

By assigning a certified professional to manage each portfolio, financial advisers are regaining valuable time that can be spent on their clients’ goals, needs, and strategies.

Data, too, supports the notion that managed accounts increase client engagement.

Namely, the Investment Trends February 2022 survey found that financial advisers saved an average of 15.7 hours a week, equating to 100 days a year, by using managed accounts – a significant improvement from the 13.0 hours saved in 2020.

With 2.6 million Australians seeking advice, and this number set to rise due to an aging population, freeing up time to assist more clients is becoming increasingly crucial.

According to Mr Burton, the added capacity can be used in a variety of ways, such as taking on more clients or focusing on the value delivered to existing clients, leading to potential growth in revenue and referrals.

Mr Burton notes that managed accounts can help advisers “focus on growing their business, rather than getting bogged down in administrative tasks”.

Research by Praemium indicates that advisers with 75 per cent or more of their clients in managed accounts see better outcomes. Sixty-seven per cent of those surveyed reported better client outcomes, while 89 per cent said they had more time to spend with clients. Mr Morris adds that these advisers also had fewer clients but more client meetings, improved profitability, and a significant increase in new clients due to the enhanced engagement model.

“In a time when costs are increasing, utilising managed accounts ensure advice costs can be managed and utilised to deliver strategic advice rather than to offset compliance and administrative duties,” Mr Morris explains.

He notes that the time savings from not having to review portfolios individually and manage compliance and administrative processes is one of the key benefits of outsourcing to managed accounts.

Challenger platforms such as Praemium have focused on improving client engagement and digitising processes, reducing administrative friction and the cost of delivering advice. This has allowed financial practices to enhance their client engagement model and focus more on clients.

“This automation and simplification of processes has considerably reduced administrative friction and the time and cost of delivering advice whilst also freeing up time to focus on clients and allowed advice practices to enhance their client engagement model,” Mr Morris clarifies.

For Mr Mennie, the combination of innovative managed portfolio functionality and great advice can provide real value for both clients and advice businesses.

“The implementation efficiencies gained from the use of managed portfolios also has a significant impact on a clients’ portfolio value over time,” he says.

“Advisers who use managed portfolios on the HUB24 platform tell us they’re able to spend more time interacting with their clients discussing strategy and helping them to achieve their goals and objectives,” Mr Mennie continues.

Moreover, he adds, the technology underpinning the managed portfolio functionality removes barriers and creates economies of scale for advisers. 

The proliferation of managed accounts     

Managed accounts were once seen as a solution for specific client types, but today, their benefits are widely recognised by financial advisers.

The increased use of managed accounts has led to them becoming a common advice model for a range of clients, including self-managed superannuation funds (SMSFs) and younger clients.

“Many SMSF advisers are run off their feet, keeping up with reporting and the administrative burden of SMSFs, especially investing directly and without the use of a platform,” says Mr Burton.

“As a result, many advisers are now turning to managed accounts as a way to more easily manage their clients’ portfolios without the administrative challenges. This can help advisers to focus on providing more value to their clients, without getting bogged down in back-office tasks,” he notes.

Moreover, Mr Morris adds that managed accounts allow for customised portfolios, with the option for stock exclusion or substitution, and the inclusion of ESG filtering tools. This means that advisers can still offer a personalised advice model, even though core portfolio management is outsourced.

“Therefore, those clients needing a more detailed portfolio approach, such as SMSF trustees, can be facilitated,” Mr Morris says.

According to the SPDR ETFs/Investment Trends 2022 Managed Accounts Report, what advisers value most about managed accounts is the extra time they have to focus on other tasks. They also appreciate their effectiveness and ease of access to professional fund management.

Other benefits include a lower compliance burden, cost-effectiveness, reduced operational risks, effective access to ETFs, tax-effectiveness, and the provision of goal-based advice.

The report also found that 68 per cent of advisers using managed accounts have been able to reinvest the capacity gains into focusing on client goals.

When asked about how their value proposition has changed as a result of using managed accounts, 43 per cent of advisers said it allowed them to focus more on client financial and lifestyle goals, 33 per cent said they could now focus on educating clients as a financial coach or mentor, and 24 per cent said it helped them distance their value proposition from investment returns.

Just under 40 per cent of all respondents said managed accounts have increased transparency while 34 per cent celebrated the cost-effective investing feature of the product. 

How cost of delay can be a costly mistake

Cost of delay represents the economic impact of a delay in acting on an investment portfolio, and in times of market volatility, identical to the current scenario, it can be a very costly mistake for advisers.

To measure the real cost of delay in the current market, HUB24 ran a study last year, the results of which were astonishing, Mr Mennie told ifa.

“What we did is we took actual live data out of the HUB-managed portfolios for a particular asset manager and looked at the changes that they made when COVID hit,” he said on a podcast.

“Then we looked at what would’ve happened if that wasn’t an instant change, which is done on the day of the decision because of the platform’s ability to do the instructions.

“Looking at whether it took one, two, four, or six weeks in delay, which often can happen when a practice is doing that manually, administratively, ROAs, meetings with clients, consent, etc. And we found over one week of delay, 42 per cent of the benefit was gone.”

Over a six-week period, that 42 per cent turned into 60 per cent.

“That speed to market is absolutely critical when you have changes in the economy markets,” Mr Mennie stressed.

“To have to do ROAs every four weeks, if the market bounces back up or the client’s portfolio needs change, rebalancing is a real challenge for practices. But it’s solved by managed accounts through the use of technology.”

Managed accounts checklist

According to Steven Tang, head of consulting at Zenith, the following checklist provides a good starting point for advisers considering a new managed account provider, which may be of assistance during this somewhat onerous process:

Consult with provider on portfolio requirements — be as specific as possible.

Confirm the number of portfolios and risk profiles on offer — do they meet your practice’s needs?

Investment philosophy and process — does this align with your practice’s philosophy?

Return and risk requirements of portfolios — are these appropriate for your clients?

Types of portfolios, accumulation, retirement, inclusion of direct equities / listed securities — as mentioned above, non-traditional assets have been missing on model portfolios but should play a bigger role going forward.

Portfolio fee budget (overall investment management cost) — is this palatable for your clients?

If your business has multiple platforms, is there consistency of portfolios across platforms?

Platform selection — there are several providers, many of which your practice may already be using. Is it easier to use a platform you are familiar with?

Consider appointing a managed account model manager within the practice.

Responsible entity (RE) selection and engagement — while the most common option is the platform RE, there are also a handful of independent REs if that is your preference.

Conclusion

Managed accounts not only provide a sense of security and peace of mind, but they also deepen the client relationship and allow advisers to deliver on their true value.

Adopting managed accounts is essentially embracing technology that is smarter and quicker, allowing advisers to improve the level of investment capability they deliver to their clients and potentially increase their own revenue.