Managed accounts prove their value in uncertain markets

The initial market response to the COVID-19 pandemic certainly put managed accounts to the test. Execution speed and efficiency became essential. Many investment managers who quickly made strategic moves across their managed account portfolios saw positive outcomes – and with markets recovering relatively fast, swift rebalancing has also added significant value over time.

At the same time, the managed account ecosystem pulled together as one: asset consultants and fund managers worked together to provide client communication, including webinars and podcasts, to support advisers and reassure investors. 

I recently spoke with three leading asset consultants at Macquarie Wrap’s SMA Fund Manager about our collective learnings from this unique year – and how they expect managed accounts to evolve in the future.

Reimagining the adviser investment model

Managed accounts have become increasingly popular in recent years, however in 2020 their benefits really came through the fore – allowing advisers to respond to fast-moving market shifts, and improving access to advice.

Unsurprisingly, the strong LONSER headwinds of 2020 saw record flows to Macquarie’s managed accounts solutions. We now have over $5 billion in funds under management across more than 239 Separately Managed Account (SMA) models with more than 50 managers.

So as we look to 2021 and beyond, we believe managed accounts will continue to take rapid market share, and partnering with asset consultants and investment managers will become increasingly important. Advisers have had time to take stock of their business in the last couple of years. After several years of vertical disintegration as well as the recent market volatility of 2020, many are now choosing to focus on their core expertise in advice – rather than portfolio management.

As Steven Jessop, Head of Licensee and IFA Sales with Lonsec, said during the panel discussion, “Advisers are in a position where nearly a third of their competitors have exited, and if they get their business structured efficiently they can grow exponentially over the next few years. That’s partly why we’ve seen them embrace managed accounts over the last nine months and expect them to continue to do so.”

Outsourcing managed account decisions to an asset consultant is one option for advisers. Others may draw on the investment expertise of an asset consultant to supplement their own capabilities – or ask them to sit on their investment committee to provide independent rigour.

Fund managers have also recognised managed accounts can be a complimentary offering to their business. And while they may compete with asset consultants, they also provide services or work closely with them.

These factors, along with the demonstrated value managed accounts added to portfolios during the volatility of 2020, have served to strengthen and expand the managed account ecosystem.

Angela Ashton, Founder and Director of Evergreen Consultants, said COVID-19 strengthened the trust advisers place in her business. “They are happier now to defer decisions to us, because we proved our IP during the crisis. The functionality of managed accounts really came to the fore during March and April 2020, at the height of the market turbulence – the ability to move funds in and out was something advisers never could have done at that scale before.”

Partners in the ecosystem

With many advisers now seeking opportunities to take greater control of their business, potentially away from dealer group infrastructure, it’s never been more important to partner with the right support network.

Jonathan Ramsay, Director of Investsense, told us his most successful relationships are now with big advice groups. “We usually get things started by suggesting they use our existing investment portfolios and get used to how managed accounts work. Then we can both get a clearer idea of what a product in their image might look like – the different problems we could solve – which in turn builds a rationale for a bespoke managed account portfolio rather than replicating what we already have.”

There was general agreement that a core-satellite approach can also be highly effective – working out what to keep in client portfolios to avoid triggering unnecessary capital gains, and then adding off-the-shelf or bespoke managed account products around it.

One factor that may become less relevant in choosing a partner is rebates, which Angela described as a “double-edged sword.”

“It can be a value add, giving clients 10 or 15 basis points off the headline rate,” she said. “But rebates are so administratively burdensome on the whole value chain.” She predicts they will eventually be phased out and replaced by special class pricing structures.

This could also shift the focus on capability and expertise when selecting a consultant partner – rather than their ability to negotiate rebates.

Supporting conscious investment choices

Environmental and social governance (ESG) factors have also emerged as a serious consideration for future investors. Having recently experienced the tangible effects of climate change through the bushfires, as well as the impact of COVID-19, investors are increasingly aware of the part they can play through the investment choices they make.

“I think this is being driven by the younger generation,” said Steven. “Advisers tell me that when they’re doing intergenerational planning with larger clients, it’s the children who are demanding more sustainable and ethical investments.”

This may be a small percentage of an adviser’s client base, but it is growing. And while planners build out a more robust portfolio of ESG options, a diversified managed account may help them tick the right boxes.

Macquarie’s SMA has incorporated ESG customisation filters since 2018, in recognition of the importance of providing a level of further personalisation, flexibility, and alignment to individual client core values.

“It has never been easier to set up ethical portfolios at a relatively low scale,” acknowledged Jonathan, who said Investsense’s sustainable portfolios have also performed well in recent times –especially those weighted to healthcare. “You need to give people the choice, and we have a big focus on designing ethical portfolios to achieve similar returns to a normal diversified portfolio.”

Delivering further upsides

In a year when every aspect of business accelerated­ –­ including the accessibility of managed accounts – Macquarie has continued to invest in its technology and platform efficiency. This will in turn help advisers save even more time, and ultimately deliver better outcomes to clients through faster execution, breadth of choice, greater transparency,  and more cost savings.

Successful advisers are now recognising the versatility of a managed account solution for a broader range of their clients. It can have a place in their overall portfolio, help them leverage diversification and cost benefits and it can also be further personalised to reflect the individual preferences or values of the client. And the time saved can be invested back into strengthening client relationships – at scale.

The first step is deciding which model option works for your advice practice: buy, build or partner. And then making sure your support network has the right capabilities, expertise and track record to get your business where it wants to be next.

Macquarie is here to help. Speak with your relationship manager to learn more about managed accounts.