Separately managed accounts are big news overseas, says Arthur Naoumidis, managing director of Praemium Portfolio Services, and are on their way to the UK
While managed funds are the traditional investment vehicle with which most advisers are familiar, separately managed accounts - also known as SMAs or managed accounts - are increasingly being promoted overseas as offering a number of valuable benefits from the perspectives of tax management, cost and personalisation.
In the US and Australia, managed accounts have, in one form or another, been around and building for many years. Their popularity in the US has reached significant heights - in some cases outstripping the funds inflow of mutual or managed funds for providers such as Merrill Lynch.
There, managed accounts are considered a premium service and are charged accordingly. Investors approve and their experience is enriched by knowing what they own, being able to track the fortunes of their investment and seeing what stocks they own and their individual value, rather than the opaque alternative of units in a trust structure.
In Australia, managed accounts represent the next generation of wrap platforms. Wraps originally came about as a vehicle to pool investors' money for access to cheaper wholesale funds and to provide consolidated reporting, alleviating the need to collect multiple reports to consolidate manually. Of course, the wrap structure has an additional layer of custody over the wrapped managed funds, each of which already has a custody service in place - hence two layers of custody fees.
Other issues with this type of structure are that investors still receive units in a trust that cannot be tax-effective, an investment that inherits the capital gains tax liability of earlier investors and a structure that does not allow the client to see where their money is actually invested. In addition, the investor may not be able to exit a wrap without triggering a capital gains tax event.
There are a growing number of advisers in Australia signing on to deploy the better conceived managed account structure because of these issues. These licensees are the visionaries - the forward-thinking advisory groups or early adopters - and they are also the ones who will enjoy the "first-mover" advantage with investors.
While complex under the bonnet, the concept is relatively simple. Managed accounts are essentially like managed funds in that their primary purpose is to provide a vehicle for investors to access professional fund management expertise.
The key feature of managed accounts as a group is that the underlying investments are held personally by the investor either legally or beneficially. In this way, pooling of funds is avoided and costs are reduced compared to the wrap - and it is technology that allows this to occur.
As a result, there are a number of key advantages managed accounts have over traditional managed funds for investors and their advisers:
lThe investor has portability and improved tax management over their investments;
lThe range of portfolios normally available in a managed fund can be accessed in a managed account;
lManaged accounts are generally cheaper than traditional managed funds and wrap platforms;
lThe investor has access to the intellectual property of professional fund managers;
lTransactions are visible and reporting is available online to both the adviser and the investor;
lThe adviser may customise a portfolio model to suit the requirements of their client;
lFees and charges are individually accounted for in a managed account; and
lManaged accounts are scalable in the same way as managed funds - a distinct advantage for advisers.
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