Guide to Managed Accounts

Guide

to Managed

Accounts Principal Sponsor

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Editorial Are managed accounts an all-weather option?

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s the research undertaken by Money Management and published in this guide confirms, growth in the Australian managed accounts market has been a key factor in shaping the Australian platform market over the past five years.

The rapid rise of netwealth and HUB24 have been underpinned by their early embrace of managed accounts on platform and, as a recent Money Management webinar confirmed, there is hope that managed account structures will help financial advisers adapt to life beyond the expected outcomes of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

How big will the managed accounts market become? Well, with $47.97 billion in managed accounts funds under management (FUM) as at 30 June, last year, and a prediction of $60 billion by 2020, it represents an increasingly important segment and one that cannot and should not be ignored by the majors.

What Money Management's own research confirms is that an increasing percentage of client funds is being invested via managed accounts and that this figure is likely to grow as advisers become more familiar with the products and as platform providers make them more usable.

But as Money Management's recent webinar rightly canvassed, the question for advisers and their clients is which type of managed account represents the best option for them – an Individually Managed Account, a Separately Managed Account or some other option.

We hope this guide helps.

Mike Taylor Managing Editor

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About the publisher FE Money Management Pty Ltd Level 10 4 Martin Place, Sydney, 2000 Managing Director: Mika-John Southworth Tel: 0455 553 775 mika-john.southworth @moneymanagement.com.au Managing Editor/Editorial Director: Mike Taylor Tel: 0438 789 214 mike.taylor@moneymanagement.com.au Associate Editor - Research: Oksana Patron Tel: 0439 137 814 oksana.patron@moneymanagement.com. au Features Journalist: Hannah Wootton Tel: 0438 957 266 hannah.wootton@moneymanagement. com.au Journalist: Anastasia Santoreneos Tel: 0438 836 560 anastasia.santoreneos @moneymanagement.com.au Product Marketing Manager: Dale Henry Tel: 0439 076 518 dale.henry@moneymanagement.com.au ADVERTISING Sales Director: Craig Pecar Tel: 0438 905 121 craig.pecar@moneymanagement.com.au Account Manager: Ben Lloyd Tel: 0438 941 577 ben.lloyd@moneymanagement.com.au PRODUCTION Graphic Design: Henry Blazhevskyi Subscription enquiries: www.moneymanagement.com.au/ subscriptions Money Management is printed by Bluestar Print, Silverwater NSW. Published fortnightly.

All Money Management material is copyright. Reproduction in whole or in part is not allowed without written permission from the editor. © 2018.

Supplied images © 2018 iStock by Getty Images. Opinions expressed in Money Management are not necessarily those of Money Management or FE Money Management Pty Ltd.

Launched 31 years ago, Money Management has firmly established itself as the leading source of news and analysis for Australia’s financial services sector.

In this time, Money Management has rapidly evolved from a B2B newspaper into a respected provider of accredited education and training, research, professional support and advocacy as well as thought leadership in the financial services space.

While it remains the most read print and online publication by financial planners in Australia and is widely recognised as a leading advocate for this profession, Money Management's growing audience is a diverse one that also includes fund managers, accountants, risk advisers and superannuation fund trustees.

Money Management is also the clear publication of choice for finance institutions – both domestic and international – seeking to connect with the high earning and well-educated professionals working in Australia’s financial services sector.

Financial Express is a financial information and communications company founded in the UK in 1996.

It has offices in Australia, India, Hong Kong, and the Czech Republic. It provides data, software, research, and ratings to help asset managers and financial advisers make better investment decisions.

In ACN 618 558 295 www.financialexpress.net © Copyright FE Money Management Pty Ltd, 2017

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My clients get more value from our time together Using managed accounts helps me reduce back-office administration. Now my meetings with clients focus more on their goals.

macquarie.com

Dane Pymble

Infinitas Asset Management

The Macquarie Separately Managed Account (SMA) is issued by Macquarie Investment Management Limited AFSL 237492.

This information is provided for the use of licensed financial advisers only. In no circumstances is it to be used by a potential client for the purposes of making a decision about a financial product or class of products.

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Contents 03

Editorial 08

Platforms and SMAs

15

Ask the experts: Royal Commission

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Contents 16

Exploring managed accounts options

28

Antares: Strategies

32

Expert analysis

38

Sponsor directory GUIDE TO MANAGED ACCOUNTS | MONEY MANAGEMENT | 7

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SMA platforms

Platforms and SMAs: A mixed picture for planners The Money Management “Platforms in your investment process” survey, which aimed to capture the true preference of financial planners on how they view platforms in their investment process, has delivered a mixed picture, Oksana Patron finds.

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ith the growing importance of platforms and the separately managed accounts (SMAs) that sit on them, safety remained one of the key concerns for planners who participated in the study. At the same time, they praised their cost effectiveness and the potential for diversification they offered.

In particular, planners were appreciative of both SMAs and individually managed accounts

(IMAs) as they managed to accommodate their needs through eliminating “timing risk”.

However, there is still plenty of room for improvement, they said, with platforms still struggling to provide the right functionalities and planners expecting a reduction in fees and further integration with other financial planning software.

Continued on page 10

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Experience shows when it comes to technology I have absolute faith in Macquarie’s ability to keep us ahead in the technology curve.

macquarie.com

Julia Schortinghuis

Lighthouse Capital

The Macquarie Separately Managed Account (SMA) is issued by Macquarie Investment Management Limited AFSL 237492.

This information is provided for the use of licensed financial advisers only. In no circumstances is it to be used by a potential client for the purposes of making a decision about a financial product or class of products.

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SMA platforms Continued from page 8

Starting points for the discussion Although the study did not clearly identify one overarching mega-trend, defining how planners’ perception of platforms has evolved so far, it did offer a few interesting starting points which might be particularly useful in further discussion of wealth management.

Amid the changing tides impacting the Australian financial services industry, not least the Royal Commission, fees and the role they play in broader decision-making around investment processes have been placed under the microscope.

According to the survey, although planners “want it all” when it comes to platforms and their business features, assigning a similarly important score across the key six criteria (that included value for money, consulting, technology, clients service offered by the providers, followed by the quality of their staff and corporate strength), they’ve recently become particularly alert to the value they received.

The effects of the Royal Commission have also forced the financial services industry, and planners in particular, to ramp up their efforts to ensure that their clients’ money follows the right path. As a result, the survey has found that more planners were relying on bespoke internal in-house research when deciding where and how to allocate funds under management, with an increasing number of respondents saying that over the next 12 months over 80 per cent of clients’ funds allocation would depend on their own

internal research.

Following this, the study additionally saw that a growing number of planners has started to monitor the suitability of third party SMAs providers, with less than 15 per cent stating they were not currently conducting further checks.

Planners also showed a higher determination to incorporate risk factors into their investment decision-making process to more closely reflect their clients’ personal risk preferences.

Below is the synopsis of the key trends which looked at the current views of financial planners as well as aimed to indicate the potential gaps in the industry and planners’ expectations.

1. Most popular platforms Despite the growing importance of new specialist platforms on the market, which managed to attract around one-third of new net fund flows, and their impact on the overall investment platform space, the majority of both aligned and non-aligned planners participating in the survey showed a high attachment to CFS First Choice.

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In

Continued on page 12

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The best value platform proposition in Australia The platform has 4,000 financial services firms plugged into it – almost everyone in the market has access to the Macquarie platform in some way.

macquarie.com

Dane Pymble

Infinitas Asset Management

The Macquarie Separately Managed Account (SMA) is issued by Macquarie Investment Management Limited AFSL 237492.

This information is provided for the use of licensed financial advisers only. In no circumstances is it to be used by a potential client for the purposes of making a decision about a financial product or class of products.

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SMA platforms Continued from page 10

2. Planners need more external party research

decisions. However, the survey found that although the majority of them used an attitude-to-risk questionnaire when dealing with clients, 11 per

When asked about the most popular methods to monitor the suitability of third party SMAs providers, the majority of financial planners chose to rely on external party research.

At the same time, the survey found that there was still a group of planners who resigned from conducting such monitoring.

cent would never override the output based on the discussion they had with a client.

4. How planners make decisions regarding clients’ funds 3. Attitude to risk Financial planners have also made a significant improvement in acknowledging the fact that their clients might have different attitudes to undertaking risk associated with the investment

In this question planners were asked one of the most important questions of the survey, being what percentage of their clients’ funds goes into each of these categories and what their expectations are for the next 12 months. a) Bespoke in-house research (internal)

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SMA platforms

b) Bespoke based on an Approved Product List (APL)

c) (IMAs)

Individually managed accounts

d) (SMAs)

Separately managed accounts

e)

Bespoke research (external)

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SMA platforms

Continued from page 13

5. What are planners looking for in platforms?

The discussed criteria included: value for money that platform providers offered, their technology and tools, consulting capabilities, client service, quality of their staff and their overall corporate strength.

However, planners who were asked to rate the importance of the following criteria for suitability of their business have delivered an inconclusive answer by assigning virtually the same rating across all categories.

Although the results from the survey showed that almost all the mentioned criteria were equally important to financial planners, based on weighted average two of them – “value for money” and “technology and tools” – received slightly higher ratings.

6. Which platforms provided the best value for money?

7. Which platforms offered the best technology and tools?

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Ask the experts

Are managed accounts Royal Commission-proof?

Participants in a Money Management managed accounts webinar believe that properly structured managed accounts can represent a safe option beyond the findings of the Royal Commission.

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inancial planning practices which have embraced managed accounts may find themselves better placed to deal with the likely aftermath from the Royal Commission into Misconduct in the Banking Superannuation and Financial Services Industry.

That was the agreed assessment of panellists on Money Management's managed accounts webinar, with netwealth joint managing director, Matt Heine suggesting that the nature of managed account provider arrangements might serve to give some comfort.

However, he said he believed the outcome was likely to be very different according to whether the discussion was around Managed Discretionary Account (MDA) operators as opposed to managed account providers such as netwealth.

Heine said that for operators such as netwealth which operated a separately managed account (SMA) under an RE structure, the situation would be very different.

“And the reason I say that is because if we focus on the managed account where netwealth is the RE there are two really important factors and that is to

be vertically integrated it needs to be your in-house product,” he said. “And in the case of a managed account it is issued by netwealth, not the advice firm.”

Heine said that, by comparison, where a managed account was being used in a business and a client-directed advice fee was being derived, the situation was different and more complex.

He suggested that in such circumstances, higher levels of disclosure were required together with up-front agreement to an ongoing advice fee.

“An MDA is different – it is a service being provided by an advice firm and conflict management comes into it,” Heine said.

MLC Limited head of Platform Strategy and Development, Shaune Egan agreed with Heine’s analysis and said that intermediaries needed to be acutely aware of the need to avoid particular structures and have the capacity to act independently, particularly when performance was below par.

Praemium Head of Distribution, Martin Morris said that it was vital to recognise consumer perception.

“Is what we’re doing what the client wants and what they perceive is happening,” he said.

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Ask the experts

Exploring the different managed account options

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Ask the experts

Written in conjunction with Toby Potter, Institute of Managed Account Professionals (IMAP)

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ith $47.97 billion in managed accounts funds under management (FUM) as at 30 June 2017 and a prediction of $60b by 2020 from Morgan Stanley, managed account momentum shows no signs of slowing down. A seemingly endless stream of new, enhanced and ever-changing models continues to roll out to stimulate, excite and confuse advice and wealth management.

But which managed account option is best for you? In this article, we discuss each of the available options and highlight many of the questions to ask yourself as a business to help you choose the right path. Our experience at Netwealth tells us each group is different and has unique needs.

Some of these needs may appear quite small, but the finer detail is important as it can be pivotal to making the right choices.

Choices, choices, choices As with most business decisions, the best option will be the one which most closely fits with your key strategic purpose.

So… what is the service you want to offer that your clients will value and how will it also create value for you?

The best option also will be the one that allows you to retain important existing business practices while also helping you to develop and improve your business.

To help your analysis we suggest the

following four areas of your business are worth considering: • Regulations • Resourcing • Revenue • Relationships Specifically, how you answer the questions below will determine which of the five managed accounts options discussed is best suited to you. The options don’t address absolutely every situation – but for most advice-oriented businesses, they are a good place to start.

Regulations Do we have our own licence? Or will we need to access a separate licence?

What authorisations do we already hold or are we prepared to apply for?

Is our business set up to manage these authorisations?

How strong is our compliance culture?

Resourcing Do the Responsible Managers on our licence have sufficient expertise for the option we are choosing?

Do we have an investment committee and is the current investment capability sufficient to undertake a robust portfolio management service?

Do we want our management team spending time on services which we could outsource wholly or in part?

What administration capability do we Continued on page 18

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Ask the experts Continued from page 17 already have, or will we need going forward?

What resources will be required to implement the option we choose?

Revenue Do we want to earn explicit portfolio management revenue from the service, separate to the advice revenue?

What level of costs are our clients already incurring and what would be the effect of a portfolio management fee?

Relationships Which platform are we using for our current managed account service (if applicable) and what options do they offer?

Will our advisers adopt a managed account service we develop and incorporate it into their advice?

What is the service our clients believe we provide and how would any new service fit with the client’s best interest?

Five managed account options for you to consider Some of the following options involve moving to a more formal use of one type of managed account. These include platform-based

managed accounts (MAs) or a managed discretion account (MDA) service, on or off a platform.

1 Establish a ‘private label’ on your preferred super and investment platform - Construct models that reflect your own investment philosophy and style, using an external licence often provided by the platform 2 Become an MDA provider - Apply for an MDA provider authorisation and continue to use your preferred platform if it supports the operation of your models 3 Utilise a platform’s public menu MA models - Increase your approved products list (APL) and utilise MAs on your preferred platform 4 Become an external MDA Adviser Engage a specialist MDA provider to offer your models and advise on this service 5 Utilise a third-party MA responsible entity (RE) – Although some platforms may not offer a facility for the platform operator to be the responsible entity of a licensee-specific MA, they will support an external responsible entity acting in this capacity.

Outlined below are some of the main features and requirements of the five managed account options.

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Ask the experts

Option 1: Private Label managed account A private label solution via a platform is a solution that allows you to construct models that reflect your own investment philosophy and style, using an external licence often provided by the platform itself which has a responsible entity licence. Your managed account can be constructed using your own internal investment capability and/or using one or more external asset consultants.

These can be a selection of individual manager MA models or diversified MA models based on your portfolio models.

In addition, if you select a full-service platform provider, they will typically provide platform administration, custody,

superannuation administration plus an online member and administration portal.

This approach may suit you if: • You already have a well-functioning investment process, delivered through a well-resourced and suitably experienced investment committee • You use the services of an external researcher for asset allocation and possibly manager selection (There are also a growing number of providers with expertise in the regulatory and compliance aspects of running investment models within advice businesses) • Your portfolio management processes are sufficiently well developed to meet the standards set by the responsible entity Continued on page 20

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Ask the experts Continued from page 19 • You want to outsource some or all security selection decisions to external managers – for example, you may choose to retain some ASX listed securities in-house. You want to control the branding and presentation of the managed account service to supplement your value proposition • You want to charge an explicit fee for the work which you undertake in the portfolio management area • You don’t want the costs, management time obligations and compliance risk of acting as the responsible entity or MDA provider.

This may not be the best solution for you if: • You feel you need to maintain full control of your own service – in this case you will want to be the responsible entity or MDA provider • You don’t feel the need to have your own specific managed accounts, but instead rely on a public menu of MA models • You don’t want to be subjected to external due diligence – in this case being the responsible entity or MDA provider will be your best option – although of course you would carry your own licensing obligations under your selected structure.

Netwealth has helped around 15 private wealth and advice groups set up their own private label. It is a sometimes slow but rewarding journey, and one that forces the business to thoroughly examine what is currently happening within their organisation.

Only then can you put together the pieces

that will result in a scalable business model going forward.

A private label is not just an investment outcome but a holistic business solution which will define how a business runs. We therefore like to spend a lot of time with each business navigating the best way for them to achieve their objectives. This includes discussing the key areas outlined in the previous table.

As part of the private label process, platforms perform varying levels of due diligence on advice groups. The infancy of the managed accounts industry in Australia has likely contributed to this outcome. Given in many cases the business will be using the platform’s responsible entity licence, the platform must fully understand the advice business and the advice business must gain a comprehensive understanding of how they will provide the services to their clients.

Option 2: Becoming an MDA Provider An MDA service (or managed discretionary account service) is a service under which a client makes contributions and agrees that those contributions will be managed in accordance with an agreed investment program. The person who provides the service is the MDA provider. As an MDA provider, you have greater control over the investment proposition you offer to your clients, but take on the additional responsibilities of being the MDA provider, which are summarised in the table on the next page.

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Ask the experts This includes the requirement (which will apply to all MDA providers from 1 October 2017) to have specific AFSL authorisations to deal in MDA services, in addition to authorisations to deal in all of the assets that may be acquired through the MDA service. You would usually also need authorisations to advise on MDA services.

LMDA and No Action letter In the past, some advisers have operated a “limited MDA service” on the basis of a limited power of attorney from their clients and a “no-action” letter issued by ASIC in 2004 (“No-Action Letter”).

However, in September 2016, ASIC took the opportunity to undertake a thorough review of its policy in relation to MDA services, including the No Action service. The result was that ASIC determined that, by October 2018, the No-Action Letter would be withdrawn and an adviser or licensee using this

approach could no longer provide discretionary management without some other structure such as a managed investment scheme or MDA service.

For many advisers and licensees, the default response to the withdrawal of the No Action Letter has been to assume that they would apply for an MDA provider’s authorisation and (assuming ASIC grants the necessary authorisations) carry on as before. This default choice isn’t necessarily the only or best option and this paper sets out a wide range of alternative options and the pros and cons of each.

The following table shows the principal similarities and differences between MDA and the “limited MDA services” which many advisers have relied upon as a result of the No Action letter. MDA (LMDA) services which many advisers have relied upon as a result of the No Action letter:

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Ask the experts Continued from page 21 Becoming an MDA provider could suit you if: • Your platform has the capability to support MDA services including the portfolio management technology (such as rebalancing), reporting and audit functions that MDA services require • You have the resources to manage a substantial compliance obligation in accordance with the requirements of the relevant legislative and regulatory regime • You have responsible managers with experience in providing MDA services, as this is a prerequisite to ASIC approving your application for the necessary MDA authorisations • You feel you need more flexibility in client portfolios than you can obtain from outsourcing to an external licensee • You accept the risk that ASIC may apply a net tangible assets (NTA) capital requirement on MDA assets in the future (possibly as soon as within the next two years), which may require MDA operators to hold amounts of capital based on certain conditions.

This may not be the best solution for you if you: 1 Establish investment templates that allow easy investment into and out of your models 2 Administer the full suite of asset classes and assets that you use within your models 3 Facilitate the different revenue/fee options you have in place with clients and associated paperwork

4 Provide audit trails of all transactions 5 Help you in facilitating client reporting requirements under your MDA 6 Provide branding that helps promote your core proposition.

Option 3: Use a platform’s public menu of managed account models Many platforms offer a large number of MA model options as part of their ‘public menu’ which include diversified, multi asset class or sector choices where the investment management is provided by a professional investment manager.

This option could suit you if: • You want the benefits of well managed diversified portfolios where your clients receive the benefits of transparency perceived to be offered by managed accounts • You are looking for increased efficiency in managing investment portfolios • You are looking for greater transparency when understanding whether changes to the investment selection or asset allocation are implemented immediately in your clients’ portfolios • You want superior risk management compared to adviser directed portfolios • You want the relative simplicity and reduced risk of a managed account service compared to the additional complexity of providing or advising on an MDA service.

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Ask the experts

This may not be the best solution for you if: • You have adequate resources within your business to develop your own portfolios and implement these through a private label solution • Part of your service and revenue model is the provision of investment services and the earning of an investment management fee • You want to offer a service in which the branding is integrated with your advice service.

If deciding to use platform retail managed account models, you need to ensure that the range of asset classes and underlying models

provide you with enough flexibility to meet the needs of your clients in a way that is aligned with your own investment philosophy. A wellconstructed platform-approved product list should include: 1 A range of diversified risk profile models – specific managers will have biases towards using either managed funds or direct listed assets so check the diversified options to ensure alignment with your current needs 2 Coverage across the primary asset classes including Australian equities and ETFs, international equities, fixed interest, cash Continued on page 24

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Ask the experts Continued from page 23

and property 3 Coverage of investment management techniques, including strategic, dynamic and tactical asset allocation, as well as index managers and alpha managers 4 If using MA models made up of managed funds, then the ability for the manager to negotiate rebates and the platform to administer them is important to keep down the overall cost of running the portfolio.

Option 4: Use a third-party MDA provider Many licensees appreciate the flexibility that offering an MDA service provides them but don’t want to apply to ASIC for authorisation to be an MDA provider in their own right. This may be because they lack sufficient capital to justify the costs of MDA compliance, the AFSL’s responsible managers lack the expertise to operate an MDA service or because

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Ask the experts they would rather concentrate on the advice and investment functions.

So what options are available if you want to be able to determine the composition of the investment portfolios they recommend to their clients?

One solution is to find an MDA provider prepared to operate MDA services for you, using investment portfolios that you are responsible for developing and on the platform of your choice.

For many AFSLs using this operating model, this represents an opportunity to develop tailored portfolios for their clients and earn revenue for undertaking the portfolio management function. Some third-party MDA providers are also investment managers with an extensive track record.

Under this option, if you are to act as the investment manager, you will likely need to comply with the due diligence requirements of the MDA provider as well as their requirements for the way advice is provided.

This option could suit you if: • The administration of the MDA services is undertaken on the platform that you use in your business • You want to be actively responsible for the changes to the investment models your clients invest in • You want the benefits of the increased efficiency in your practice that come from adopting managed accounts • You want superior risk management compared to adviser directed portfolios • Part of your service and revenue model is the provision of portfolio management and the earning of portfolio management fees

• The annual review and other advice requirements of an MDA service can be integrated into your advice processes.

This may not be the best solution for you if: • You do not want the additional cost of a third party involved in providing services to your clients • The administration of the MDA service cannot be easily integrated into the platforms you use in your business.

Option 5: Third-party responsible entity In addition to the platform offering its own MA services, a number of platforms allow an advice business to work with a third-party responsible entity to act as the legal issuer of their platform MA. This may be because, as a medium or larger advice business, you have a related company in your organisation which is already a responsible entity for managed funds or because the platform you work with prefers to operate in this way.

Under this option, the third-party responsible entity acts as issuer of your MA models and may appoint your organisation as investment manager to these models. You will need to comply with the due diligence requirements of the responsible entity. If you are performing the functions of the investment manager you may be entitled to receive portfolio management fees. So what options are available if you want to be able to determine This option could suit you if: • The platform that you use in your business Continued on page 26

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Ask the experts Continued from page 25 supports third-party issuers of MAs • You already have a relationship with an organisation that has the relevant responsible entity AFSL authorisation • You want to be actively responsible for the changes to the investment models your clients invest in • You want the benefits of increased efficiency in your practice that come from adopting managed accounts • You want superior risk management compared to adviser directed portfolios • You want to earn the portfolio management fees.

This may not be the best solution for you if: • You do not want the additional cost of a third party involved in providing services to your clients • You use multiple platforms and this service is not available on all of them.

A final note: beware of platform leakage Once you have decided on the correct managed account options, managed account model, and you are in the process of selecting a platform, it could be worth looking at the nitty gritty of how your selected platforms algorithms work.

Given the potential impact on performance, leakage that may occur as a result of fees (including brokerage) and transaction timing are important considerations.

Consider the following: • How does your platform trade assets?

What are the costs of managed funds trading and shares trading?

• Are all equity trades placed the same way, e.g. volume weighted average price

(V WAP) or are fixed interest and ETFs managed into the market given their potential liquidity issues and resultant higher values?

• What times throughout the day are trades placed? What are the cut-off times when trades are added to the following days queue?

• How does your platforms algorithm handle partial trades?

• How is income treated within the models?

Netwealth has been working with many MA investment managers over the past two years, looking at how, as a platform, we can minimise tracking error on client portfolios. Prior to adding new managers to our retail ‘public menu’ list, we ensure they pass a stringent due diligence process which, amongst other things, ensures alignment between the manager and our platform.

Automated ROAs – an alternative to managed accounts?

Some advisers or licensees decide that, rather than adopting a managed account option, the best solution is to concentrate on improving their advice process.

If managed accounts are not for you, you may want to consider whether other technologies and mechanisms could improve your investment advice offer.

Savvy businesses look for greater automation in their investment process, particularly through the use of model portfolios,

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Ask the experts

rebalancing technologies and where possible optimising the record of advice (ROA) process.

Some platforms now have partly automated solutions for the generation of ROAs which can result in a far more efficient outcome for those not heading down the managed account route.

Whilst this can achieve significant benefits, delays in implementation remain as client authorisation is still required. This can be partly overcome where electronic signatures technology is used by advisers and their clients to sign off the ROA. At Netwealth, you can use our model portfolio and SMART™ rebalancing technology to efficiently and accurately construct, manage and rebalance client portfolios. Shortly, you will be able to generate an ROA as part of this process, where your client can then accept it online, both via a PC and their mobile.

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Strategies

A tried and true SMA provider They say practice makes perfect and, as journalist Hannah Kantor finds, as one of the earliest providers of SMAs in Australia, Antares has no shortage of that.

A

ntares picked up on the potential of SMAs way back in 2010.

Head of equity trading, Bruce Rose, says that as soon as the firm saw the technology that enabled SMAs, they knew that they needed to be offering them.

“Once we saw that [potential], we thought we’ve got to get in now to understand it, to find out the kinks and work out how to give our clients the best possible outcome,” he says.

“That’s why we now have institutional grade SMAs that we provide to retail investors.”

And that’s a key benefit of SMAs – as Rose says, they allow Antares “to treat a $10,000 account the same as a $1 billion account”.

With an SMA investors actually hold stocks themselves.

“From an end-user perspective, clients like to know what they own, they like the transparency.

Clients want to see what they own and that’s sometimes not there in a trust structure,” co-head of Antares Equities Nick Pashias says.

Lower fees also make them appealing, as SMAs don’t have the steep brokerage and administration costs of unit trusts. Add in the tax advantages, and it’s clear why everyone is talking about SMAs. As regulations change for advisers, the fact

that they are licenced to recommend SMAs as they are registered managed investment schemes holds appeal to advisers too.

The Antares investment team itself has a wealth of investment experience to draw on when providing these solutions, too.

Its nine members have 19 years’ industry experience on average, 14 of which are with Antares.

“We’ve got a lot of experienced people who’ve worked together for a long time and are convinced that the best results can only be achieved through a disciplined and sceptical investment approach.

We are stock pickers and we use fundamental bottom up research that involves looking at companies and industries, and modelling cash flows to come up with our valuations. Then we buy and sell using the results of our research process and based on the objectives of the product involved,” Pashias says.

“We have the experience, but lots of people have that. We have the experience in getting it right. And our resolve and commitment [to that] has only gotten stronger with time.”

A COMPREHENSIVE OFFERING With four SMA model portfolios covering a variety of investment styles and types, Antares covers a range of investors’ needs.

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Strategies

“We have a number of different model portfolios that sit well with different investor appetites and lifecycles,” Pashias says.

Should a client want a growth focus, for example, advisers could point them toward the Ex-20 Australian Equities Model Portfolio. For those after income, the Dividend Builder or Listed Property Model Portfolios could serve them well.

Core Opportunities The Core Opportunities Model Portfolio does as its name suggests; provides investors with a portfolio of core stocks. The portfolio contains only Antares’ highest conviction investment ideas.

“I thought about how I’d want my money managed,” says Pashias, who has managed the strategy at Antares for 12 years.

“There’s broad appeal for investors; it’s not narrow or a high dividend or yield type product. It’s broader than that,” he says.

It’s suitable both as a core holding itself or to marry with other investments depending where investors are at in their lives.

It could complement both income and growth portfolios, for example.

Antares’ philosophy that the market is inefficient and can be exploited is evident in the SMA Model Portfolio’s success.

It invests in both core and trading components in an 80:20 ratio to ensure that investors have exposure to both longer-term core holdings and more opportunistic situations.

“I want exposure to both of these,” Pashias says.

Dividend Builder Suited to income-oriented investors, the Dividend Builder Model Portfolio aims to deliver regular

income and achieve moderate capital growth by investing in a diversified portfolio of Australian companies.

And the Dividend Builder Model Portfolio which has returned 10.2%* net per annum since inception^ shows the Antares team has delivered.

The firm was one of the first to offer a yieldfocused product like this in a market now flooded with them, so its experience is once again a key advantage for investors looking to that market.

Antares investment manager, Brett McNeill, Continued on page 30

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Strategies Continued from page 29 also points out that the strategy is grounded in putting fundamental assets first much more than many other dividend income products.

“It’s not a Johnny come lately yield product,” he says.

The simplicity of the strategy is suited to SMAs specifically too.

“It’s perfect … because it lends itself to a very efficient administration procedure like the SMA handles and transparency,” McNeill says.

“It’s a very simple vanilla product structure. We don’t short stocks, we don’t invest in any illiquid securities, and it’s all 100% liquid securities. So investors can look at their holdings with our direct SMA structure and feel comfortable with what they see.”

Ex-20 Australian Equities According to Antares investment manager John Guadagnuolo, the main appeal of Antares’ newest SMA Model Portfolio, the Ex-20 Australian Equities, lies in where it invests.

An actively managed, highly concentrated portfolio, it looks to Australian shares outside the 20 largest companies by market capitalisation for significant long-term capital growth.

Guadagnuolo says that the midcap space is an ideal hunting ground for such growth.

“These companies are typically mature enough to fund themselves to grow, but young enough to have ample growth opportunities in front of them.”

“That allows them to display superior earnings growth to other sub-sectors of the market, which we can capitalise on.”

“In May 2018, we celebrated the three-year track record, with net returns of 12.8% per annum delivered over this

period, it’s clear that the investment team is succeeding in taking advantage of this.”

Labelled a “satellite strategy” rather than a core holding by Guadagnuolo, he suggests that it would suit por tfolios looking for some capital growth.

Listed Property The specialist area of property can be tough for retail investors to break into. With the Listed Property Model Portfolio that invests actively in listed Australian property and property-related securities, McNeill believes that this can make property investment easier.

“The key attribute of the Model Portfolio is it gives ordinary investors, retail investors, the opportunity to invest (through AREITs or listed Australian companies operating in the property industry) in some very high quality commercial properties that they wouldn’t otherwise be able to access.”

McNeill points to Chadstone shopping centre, Australia Square and Grosvenor Place as examples.

The cyclical nature of property highlights the need for active management in this area not just to open investments up to retail clients but also to make quality investments.

“With our SMA Model Portfolio, investors can get this without the price tag of a unit trust.”

Then, of course, there’s the traditional benefit of specialist asset classes like listed property to investors: diversification.

McNeill says that it can offer balance to portfolios that have bonds and equities, plus a nice blend of income focus to a broader equity portfolio.

“Listed property stocks stack up very well, based on quality, liquidity and pricing. It’s got a good place in a diversified portfolio.”

*As at 31 May 2018. Past performance is not a reliable indicator of future performance. Returns are not guaranteed and actual returns may vary for any target returns described in this document. ^ Inception date is 22 November 2010.

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Expert analysis

How your clients and business can benefit from MDAs As the popularity of managed discretionary accounts continues to climb, Eugene Ardino outlines exactly what financial planners should know about advising on them.

T

he Australian MDA (managed discretionary account) market continues to go from strength to strength with growth of more than eight per cent from June to December 2017, according to figures from IMAP, the Institute of Managed Account Professionals.

Total funds under management (FUM) for Australian MDAs stood at $25.47 billion as at 31 December 2017, up from $16.72 billion a year earlier.

So what is an MDA and why are they surging in popularity among clients and planners alike?

An MDA is an investment service through

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Expert analysis which an investment manager holds a portfolio of assets on behalf of a client and makes all the buy and sell decisions to generate a return. The decisions are made by the planner according to the initial strategy agreed upon with the client.

A key distinction between MDAs and ETFs (exchange-traded funds) or managed funds is that the assets are managed on an individual basis rather than as a pool of investor assets.

MDAs have the advantage over ETFs and managed funds of providing a more tailored investment approach for clients.

MDAs can invest in a broad range of assets including shares, options, fixed income, managed funds, cash and listed property.

MDAs are also often confused with SMAs (separately managed accounts). The main difference is that SMAs offer the same portfolio of assets to all investors (although the assets are individually owned), so are considered a product, whereas MDAs provide a more bespoke strategy to meet client goals, so are categorised as a service.

There are a number of advantages to the client of maintaining legal ownership of the investments in their portfolio. Obviously, all the income and capital gains generated by the portfolio are retained. But also from a tax perspective, the client benefits from tax entitlements such as franking credits and is not affected by the unrealised gains or losses of other investors as they would be in a managed fund.

For financial planners, MDAs can greatly reduce the cost and increase the efficiency of servicing clients’ investment needs.

There are considerable efficiencies of scale available through MDAs. Consolidated reporting and bulk ordering reduces overall costs for

planners. These larger margins mean cost benefits can be passed on to clients.

With the planner having the discretion to buy and sell for clients, MDAs offer a much more efficient system than having to call the client for approval for every decision that is made. They also have the advantage for the client that the MDA manager is able to respond more quickly to market movements.

The Australian Securities and Investments Commission (ASIC) requires that the MDA contract be reviewed annually to ensure the portfolio maintains optimum suitability for the client.

Nevertheless, MDAs are relatively straightforward to administer as they don’t require an RE (responsible entity) or a PDS (product disclosure statement).

However, as the saying goes, “with great power, comes great responsibility”. MDAs will only work for you if your clients have absolute confidence in your ability, and that of your MDA provider, to make the best investment decisions on their behalf.

Remember that MDAs are not for everyone.

Planners may find that their older clients, for example, place greater value on a more personalised level of service.

More engaged clients might find that they want a higher level of control over their investment decisions than MDAs allow, although the platforms do allow clients to view their open positions at any time.

Ultimately, the MDA is only appropriate for a client if it truly serves their best interests.

Eugene Ardino is the chief executive of Lifespan Financial Planning.

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Expert analysis

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Expert analysis

Managed accounts - what is driving increased interest?

Eylem Kamerakkas writes that appetite for the increased transparency, control and engagement that managed accounts offer mean that they are giving equities and managed funds a run for their money.

I

n the last year alone, interest in using managed accounts increased sharply at the expense of direct equities and managed funds. We believe this growth is set to continue, with advisers expecting a share of new client inflows to managed accounts to double in the next three years.

Managed accounts have been around for close to two decades, so why the sudden increase in popularity?

What’s clear is that the recent uptick in interest is attributable to not only the myriad of benefits managed accounts offer but also the direction that the industry is moving towards – one

of further efficiency, transparency, trust and professionalism.

Today, more advisers and their respective firms are looking for products and services that serve to create practice and compliance efficiencies, as well as to enhance their value proposition and affirm their role as strategic financial advisers, responsible for managing their clients’ financial affairs and helping them achieve their objectives.

With drivers like this, managed accounts continue to gain momentum as a suitable option.

It’s worth highlighting some of the key Continued on page 36

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Expert analysis

Continued from page 35 benefits to understand just how powerful managed accounts can be, particularly when used to their full potential.

to take advantage of emerging opportunities and manage risk in a dynamic and convenient manner.

Transparency and control

Efficiency and cost effectiveness

The structure of managed accounts serves to provide optimal transparency and control for advisers and their clients. Unlike managed funds, clients maintain direct ownership of their investment portfolio and have full visibility of their entire portfolio holding, including the direct equities and their weightings.

Clients can also take advantage of the tax effectiveness managed accounts offer. When holding securities in a managed account, the investor’s tax position is their own and is not affected by the actions of other investors or transactions made prior to their investment.

So in effect, when working closely with their adviser, clients are empowered to build a diversified portfolio that is not only in accord with their personal values, but also one that is far more tailored to achieve their individual financial needs and objectives.

The transparency and control factors are elevated further with advisers having the choice to either utilise the expertise of their own in-house investment teams or alternatively leverage the expertise of an extensive range of global and domestic investment managers.

Ultimately, these transparency and control benefits allow advisers and investment managers

Managed accounts continue to be a popular option due to their ability to deliver a broad range of efficiencies, ranging from practice management, with advisers on average saving 12.4 hours a week on portfolio management tasks, right through to advice delivery, implementation and execution.

By using managed accounts, advisers are less distracted by unnecessary administration, with time savings invested back into enhancing their personal skillset, ongoing client engagement, meeting new or prospective clients and practice development.

These gains empower advisers to focus on tasks that truly add value to their clients, while outsourcing parts of their value chain that are better served by professional investment managers, which can help to increase automation of an adviser’s back office functions.

This change in focus is also giving advisers increased negotiating powers to secure competitive pricing for their clients, making the managed accounts proposition even more appealing.

The efficiencies and the benefits of preferred pricing is further magnified for managed accounts offered through platforms – in fact, among advisers recommending managed accounts, separately

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Expert analysis

managed accounts on platforms is the preferred way of implementing managed accounts for 79 per cent of advisers.

What is clear is that advisers, platform providers and product manufacturers alike recognise that clients today expect real-time service that is far more tailored and compatible with their holistic needs – from a financial, lifestyle and an engagement perspective.

There is, however, clear potential for even more streamlined and competitive solutions.

The continued popularity of managed accounts is going to further propel existing players, as well as provide significant opportunities for new entrants to focus their time and energy on expanding their product and technology capabilities in order to keep up with the evolving needs of their clients in an increasingly connected and digitalised environment.

Enhanced client engagement and improved client outcomes In seeking to capitalise on the increased functionality, thanks in part to transformative platform technology, as well as the transparency benefits and efficiency gains, industry research shows that advisers are increasingly utilising managed accounts as a whole of portfolio service across their broader book, with the vast majority acknowledging that since embracing

managed accounts, their clients’ financial outcomes have improved.

No longer are managed accounts perceived to be solely suited for high net worth clients, rather their suitability extends to lower balance clients, as advisers continually look for greater opportunities to deliver timely, cost-effective and quality services.

The benefits of managed accounts serve to assist advisers to provide financial services, and in particular advice, in a more streamlined and compliant manner. The cumulative effect of all of this is that advisers are empowered to focus on what they do best – providing strategic advice, building client financial literacy and delivering client outcomes.

As a result, the conversations with clients are more meaningful, the relationships are deeper and client engagements are far more sophisticated.

Conclusion Managed accounts are proving to be an effective option for a range of clients and have the potential to provide a more effective alignment of values throughout the entire advice and service value chain. In turn, clients’ expectations of transparency, efficiency and control are met. An outcome that will clearly go a long way to forging even deeper long-term client relationships.

Eylem Kamerakkas is head of Managed Accounts Product at Macquarie Wealth Management.

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Sponsor Directory Banking and Financial Services (BFS) comprises Macquarie’s financial services and retail banking businesses, providing a diverse range of wealth management, personal and business banking products and services to retail clients, advisers, brokers and business clients. As at 31 March 2018, the group had total BFS deposits1 of $A45.7 billion, an Australian mortgage portfolio of $A32.7 billion and funds on platform2 of $A82.5 billion.

Macquarie Wealth Management provides clients with a wide range of wrap platform and cash management services, investment and superannuation products, financial advice, private banking and stockbroking. It delivers products and services through institutional relationships, adviser networks and dedicated direct relationships with clients.

1. BFS deposits exclude corporate/wholesale deposit balances.

2. Funds on platform includes Macquarie Wrap and Vision.

Since its inception in 1994, the Antares Equities team has established itself as a specialist in the active management of Australian equities, first as Portfolio Partners and later as Aviva Investors. Key to Antares success is the experience, stability and judgment of its investment team. The team believes that superior investment performance can only be achieved through a disciplined and sceptical approach to investing.

Fundamental bottom up research that is detailed, style agnostic and systematic underpins Antares stock selection. This enables the conviction and courage to move against markets and exploit their inefficiencies.

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