Michael Heine has extensive experience in Australian and European financial markets. He is the Managing Director of netwealth Investments Limited, which he established after his previous company Heine Investment Management was acquired by Mercantile Mutual (now ING) in 1999 for over $115 million when it had almost $3 billion funds under management. Managed accounts provide advisers and clients the ability to invest in one or more professionally managed models with direct ownership of underlying assets, as opposed to managed funds. The benefits of managed accounts become more evident when advisers need to combine multiple models that require regular rebalancing.

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Michael Heine , managing director, netwealth Investments Limited
Michael Heine has extensive experience in Australian and European financial markets, including commodity trading,
international financing, mortgage lending and property development through the privately owned Heine Brothers
organisation. His involvement in public unit trusts commenced in 1982 when Heine Investment Management Limited
was established. Heine was acquired by Mercantile Mutual (now ING) in October 1999 for more than $115 million
when it had almost $3 billion funds under management. Michael then proceeded to establish netwealth Investments
Limited of which he is the Managing Director.
Investment Selection and
Portfolio Rebalancing
Under Managed Accounts
The benefits of managed accounts become even more evident
when advisers need to combine multiple models, which in turn
need to be rebalanced regularly, writes MICHAEL HEINE.
Michael Heine The financial services industry has never
experienced such rapid and extensive legislative,
regulatory and market changes than those
that have been thrust upon it over the past few
years and which have resulted in the multitude
of challenges being experienced by financial
advisers today.
It is disappointing that although the vast majority of advisers are
extremely professional and provide a valuable service to clients, a few
errant and high profile failures have focused undue and negative at-tention
on the industry as a whole.
More than ever before an adviser needs to understand and engage
with their clients and demonstrate the value of their advice on a regu-lar
basis.
All steps of the planning process should be reviewed and enhanced,
clear processes need to be documented and implemented and should
embrace the adoption of evolving technology wherever possible.
Understanding the investment process
under MAs
One of the key areas where efficiencies can be gained by planners is
in the investment process.
Managed accounts have for too long been “the next big thing” but
have yet to come of age and achieve widespread adoption.
I prefer to use the term Managed Accounts to describe all the prod-ucts
variously described as SMAs, MDAs, implemented portfolios,
et cetera. Many of these different terms in fact reflects the different
legal structures available while others are pure marketing terms and
each may vary in its actual means of implementation.
Managed accounts provide advisers and clients the ability to invest
in one or more professionally managed models appropriate to their
risk profile with direct ownership of the underlying assets. They dif-fer
particularly from managed funds in the following ways:
Clients see their actual underlying holdings and their individual
performance and not just a single investment in a managed fund.
There is no buying into the embedded tax liability of a managed
fund.
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Individual rules, and exceptions can be set for each investor so that
each portfolio becomes very personalised.
Changes to portfolios by the investment manager can be imple-mented
across some or all clients as frequently as required without
the need for individual ROAs or SOAs thereby saving implementa-tion
leakage as well as significant workload by the adviser.
No MDA licence need be held by an adviser to initiate changes to
client portfolios.
Models can be tailored to meet an adviser's requirements.
Models may comprise all domestic equities, ETFs, managed funds,
international equities and ETFs or any combination of these.
Investment Trends research shows that in 2014 18% of planners
used SMAs which is the same number as in 2011 so there has been no
increase in that time. However the same research indicates that the
percentage of planners intending to start using SMAs has increased
from 10% last year to 17% this year!
What is the reason for this improved outlook?
In recent times we have seen a greater number of investment man-agers
and dealer groups providing a larger and more diverse range of
managed models which has given adviser greater choice.
At the same time platforms are also increasingly making managed
models available and the technology to integrate managed accounts
into a platform will continue to drive significant growth of managed
models usage.
To date the providers of managed accounts have been niche pro-viders
with a small client base and funds under management. Main-stream
platforms are increasingly providing capabilities to integrate
managed accounts into their platform and mix them with other plat-form
assets.
This ability to manage all client investments including managed
accounts on a platform and to provide the full functionality and
reporting of the platform across all assets is critical to the further
growth of managed accounts, client outcomes and adviser efficiency.
What will differentiate the platform providers of managed ac-counts?
The degree of integration and functionality within a platform will
vary from provider to provider.
To be truly beneficial to an adviser and their clients, it is important
that the managed account has a simple and robust legal structure
and:
Can manage the calculation and implementation of 20 or more
managers, each with many models, hundreds of underlying invest-ments
and thousands of investors
Investment options include all asset classes
Offer the ability to blend several models
Can be extensively tailored for individual clients with rules and
exceptions
Must be available within superannuation accounts
Has capability to report on performance of assets across the man-aged
account and non-managed account assets (for example if
BHP is held on the platform both in the managed account and
outside the managed account)
Has efficient trading to ensure that transaction costs do not ad-versely
impact on performance
In its simplest form an adviser may adopt several models covering
different risk profiles comprising managed funds only. Should the
investment manager chose to change underlying managers or funds,
the managed account operator receives instruction directly from the
investment manager and implements all changes across all the advis-er’s
clients after taking into account all rules and exceptions applied
to clients. These rules may include for example, minimum trade size,
minimum holdings and CGT rules as well as individual client excep-tions
such as excluding particular assets from purchase or sale.
The benefit of this process for the adviser is that models and un-derlying
assets are constantly monitored by the investment manager,
changes are made as and when appropriate and all clients’ portfolios
are updated immediately by the managed account provider without
the need for individual client authorisation thereby saving the adviser
considerable administration and delay in implementation.
Reporting by the investment manager in respect to models on a
regular basis to the adviser means that the adviser can keep clients
updated as to the market, portfolio changes, outlook, performance
etc. simply and efficiently eliminating a substantial amount of back
office work.
If the adviser was operating under an MDA licence as an alterna-tive
to using managed accounts, while they would not need individual
client approvals to proceed they would nonetheless have to manually
implement the changes across all portfolios individually and would
have to consider any specific rules or exceptions on a client by client
basis consuming considerable admin downtime.
The benefits of the managed accounts solution becomes even more
evident when wanting to combine multiple models or models with a large
number of underlying assets which require to be rebalanced regularly.
While some investment managers may rebalance infrequently,
others will have a much higher turnover. Without the benefit of a
managed account this would lead to very high volumes of admin by
the adviser (See: Be fast, not furious).
A further benefit of managed accounts is that the adviser can de-termine
how frequently they wish clients to be rebalanced back to the
model or models depending on whether they are adopting a fixed or
floating model. Again the amount of work involved for an adviser if
they were to individually rebalance clients rather than use managed
accounts may lead to less frequent alignment of a client’s portfolio to
their risk profile.
New clients can be easily allocated to an existing model or mix of
models and implementation is efficient and immediate (See: A Case
of InstaModelling?).
While some investment managers
may rebalance infrequently, others
will have a much higher turnover.
Without the benefit of a managed
account this would lead to very high
volumes of admin by the adviser.
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The established managers are seeking to protect their existing
business models by retaining their existing margins and intellectual
property although we expect this to be eroded over time.
It should be noted that models provided by an individual model
manager may have very differing performance between platforms
depending on the efficiency and technology employed by the man-aged
account provider.
Implementation is a key factor in ensuring individual client re-turns
are as close as possible to the “shadow” portfolio. Speed of
implementation, quality of algorithms, trading costs and timing can
all have a significant impact on actual outcomes.
Lonsec has commenced rating managed account platforms and
advisers should be aware of the strengths and weaknesses of each
when selecting a platform. We expect other research houses to also
enter the field as the market grows.
The advanced technology being provided by full service platforms
that have scale and the right legal structures in place is certain to
drive significant growth of managed accounts in the years ahead. fs
Diagram 1: Be fast, not furious
Whether an adviser wishes to use direct equities, hybrids, ETFs
or managed funds, a managed account can provide a highly efficient
investment solution which benefits the client and the adviser and de-livers
value all round.
Consideration in manager and strategy selection
Advisers need to carefully consider the capabilities of investment
managers when selecting models and managers and should seek ap-propriate
research to support the selection.
While the provision of managed account research is relatively new,
the availability and breadth of research is rapidly expanding as the
market develops. In addition to the traditional investment research
houses, several asset consultants are reviewing and reporting on
manager capability, investment strategy and risk management. Ad-ditionally
there are a number of asset consultants providing services
which can be useful in assisting dealer groups and advisers in build-ing
their own bespoke models.
Typically one would expect to see a diverse range of asset classes
being made available including Australian equities, diversified funds
and global equities. Sub asset classes of Australian equities would
include Value, Growth, Neutral, Mid Cap, Small Cap, High Yield
and Property. Diversified funds would include Defensive, Conserva-tive,
Growth and High Growth. Models may be active, passive or a
blend of both.
Well known brand names are available through managed account
services however we are seeing a greater number of boutique manag-ers
on menus that typically deliver specialist models and are gener-ally
more prepared to share their IP than the larger well established
fund managers.
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A Case of InstaModelling?
When Instagram was first launched, it was a simple yet innovative
solution to an age-old hobby: photography. But while shutterbugs
of yesteryears were happy to wait a few days to wait for their photos
to develop, today’s photo enthusiasts are not quite as patient.
Instagram provided that solution by allowing people not just to
share their photos immediately but to customise them according to
an individual’s choice of filters.
Here is a step-by-step explanation:
1. Models are set up by the managed account provider at the
request of the adviser. The models specify the individual
underlying assets in the model and the percentage allocated to
each asset. The assets and the percentage allocation can be
modified by the model manager at any time.
2. When a new client is put into the managed account product by
an adviser, the adviser need only to allocate the percentage of
the client funds to one or several models. So 100% of the funds
may be allocated to a single model or may be divided between
several models on a percentage basis.
CPD Questions
1. Which of the following statements is CORRECT in relation to
managed accounts and how they differ from managed funds:
a. Investment models within managed accounts can only use specific
asset class such as domestic equities.
b. Investment models within managed accounts can use two asset
class combination such as domestic equities and ETFs.
c. A MDA licence is needed to be held by an adviser to initiate
changes to a client’s portfolio.
d. Investment models may comprise all domestic equities, ETFs,
managed funds, international equities or any combination of these.
2. From the article, research shows that there is a high rate of
planners using SMAs since 2011.
a. True
b. False
3. What will differentiate the platform providers of managed
accounts?
a. Offer only one type of investment model
b. Can be extensively tailored for individual clients with rules and
exceptions
c. Offers an efficient trading platform to ensure that transactions costs
do not adversely impact on performance
d. Both B and C
e. Only B
3. The rules applicable to the model at the model level will be
automatically applied such as minimum trade size, minimum holding
per asset etc. Individual rules may be applied by the adviser to meet
a particular client requirements if desired but is not necessary.
For example, a particular client may not wish to invest in a
particular asset which could be excluded from any rebalancing
irrespective of whether the model manager includes it or not.
4. The adviser can also determine what happens to the cash not
invested in that asset. They may wish for it to be left in cash or
may want it allocated across the balance of assets or perhaps
invest in a substitute asset.
5. Once the client is set up, the managed account provider
automatically implements the investment of funds in accordance
with the model and the client specific rules. The adviser need not
be further involved.
6. If, however, the adviser were to rebalance each portfolio individually
it may result in hundreds or even thousands of individual
transactions depending on the number of portfolio changes and the
number of clients involved resulting in a huge adviser workload.
4. A new client can be easily allocated to an existing model
or mix of models and implementation is efficient and
immediate.
a. True
b. False
5. Which of the following factors can influence the actual
outcomes within managed accounts?
a. Speed of implementation
b. Quality of algorithms
c. Trading costs
d. Timing
e. All of the above
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