Have managed accounts withstood the COVID-19 test?

by Zac Leman, Head of Managed Accounts, BT.

While we are still very much in the middle of a pandemic, here’s what we know so far about investing during a time of market volatility: speed and expertise have made all the difference.

At the start of the year, when markets plummeted after the World Health Organisation announced the coronavirus was a pandemic, advisers who used vehicles such as managed accounts were able to benefit from the expertise of investment managers who could move quickly to minimise the impact to their clients’ investments. Likewise, they could rebalance their portfolios to take advantage of the ensuing market upswing.

A recent study by Philo Capital Advisers has assessed the impact on investors when implementation of asset allocation decisions is delayed for periods from one to 13 weeks due to lengthy advice or administrative processes. The Philo study used over 800,000 notional track records over a 20-year period commencing in 2000, to take into account different market conditions.  

The study indicated that, on average, 50 per cent of any excess return was lost if an investment decision was delayed by four weeks. If a client had taken three months to respond after a financial adviser had sent them a record of advice (ROA) making a recommendation to change their portfolio, this delay resulted in an average  80 per cent reduction in the additional return they could have enjoyed. By contrast, immediately implementing an investment decision lead to simulated excess returns of 1.1 per cent a year over a rolling three-year period.¹

Drawn to the promise of speed and efficiency without compromising compliance, more and more advisers are implementing managed accounts. While managed accounts have been around for over 20 years in Australia, their recent growth has been phenomenal, attracting approximately $70 bn in the last five years, pushing the total amount of funds in managed accounts to $79 bn (as of Dec 2019, according to IMAP). Whether managed accounts have performed as expected for advisers and investors during the pandemic was the topic of a recent virtual roundtable hosted by BT. Here are the key insights shared by the participants which included leading advisers and investment experts from around Australia.

1. Managed accounts allow investment managers to act quickly to reduce risk or take advantage of market opportunities

A core difference between the traditional advice model and managed accounts is, under the latter, the responsibility for investment management typically sits with investment managers who have the discretion to make decisions rapidly, in line with the overarching strategy.

The experience of Tynans Advice during the pandemic demonstrates how the discretionary nature of managed accounts enables fast execution.

Having recently moved from model portfolios to a separately managed account (SMA), Tynans Advice saw the advantages of centralising the execution of portfolio changes at the height of market turbulence during the COVID crisis. In a challenging environment where intra-day movements were 10 per cent up and five per cent down, their portfolio was rebalanced across the client base quickly by the investment manager of their SMA.

Annika Bradley, investment governance consultant at Tynans Advice, said that, at the end of March, their growth and defensive targets were out of weight, given the sell-off, which provided an opportunity to consistently rebalance across the board.

As Tom Schubert, Managing Partner and Portfolio Manager at Drummond Capital Partners put it, March 2020 was one of the fastest bear markets in history, but it was quickly followed by one of the fastest recoveries in history. As the outlook improved, investors who acted promptly were able to participate in the recovery. Speed of execution was paramount, and the nature of managed accounts enabled investment managers to achieve that.

2. Managed accounts help advisers fulfil their compliance obligations

Where advisers are required to produce advice documentation before an asset is bought or sold (for example, an ROA), advisers are potentially forced to choose the order in which they engage with clients when markets are volatile and speed is of the essence.

With managed accounts, although communication remains paramount, advisers typically do not need to consult with clients about every transaction. As a result there can be no risk of a perception they are dealing with clients that generate the most fees or those with the largest assets under management before other clients.

Moreover, managed accounts can deliver to advice practices a documented audit trail of decisions and records of client communication.

Mark Smith, head of Elston adviser services, Elston Group, said that there’s almost a divide between advisers: those who used ROAs and weren’t able to move as quickly, versus those who used a managed account format.

3. Managed accounts can reduce advisers’ costs to serve clients

To reduce the cost to serve, maintain margins and ensure the sustainability of their practice, many advice practices have been unwinding legacy pricing arrangements, resegmenting their client base and outsourcing functions and services.

Managed accounts can be an important part of cost reduction. Advice firm Logiro has been able to reduce their adviser force to three key people and offshore some administrative processes, while also lowering compliance costs. Delegating the investment process to professional managers can also reduce fees, and this is a benefit that can be directly passed to clients.

4. Communication strategies which managed accounts support help to keep clients calm

Some advisers have been able to leverage their investment managers’ communication tools, which have helped to keep clients calm during the crisis.

At Quilla Consulting, once they have agreed on changes with their clients, they put together a brief communication for the advisers to share with their clients to articulate the changes and why they are being made. This happens prior to the changes being made so the clients can see the change in their portfolios around the same time that they see the communication on why the change is occurring.

Similarly at Elston, within 48 hours of an investment decision, a video and written communication is sent to advisers by email and text, outlining the rationale behind the decision to buy a security or fund, which advisers can use in their client communications.

5. The transparency of managed accounts help with enabling clients to understand what’s happening

Managed accounts can also facilitate better conversations with clients around investments because they give advisers insights into the tactical positions investment managers take in the portfolio. Kellie Treweek, Senior Adviser at Logiro, said that she can tap into investment managers’ intellect to understand the positions taken in the portfolio for the betterment of their clients.

Although managed accounts have been an established part of the investment landscape for many years, the current climate has demonstrated that they can potentially provide value to advice practices through periods of uncertainty and volatility, further strengthening their appeal.

To find out more, you can watch the full BT Managed Accounts roundtable video here.

Roundtable participants

• Andrew Connors, Managing Director and Portfolio Manager, Quilla Consulting
• Annika Bradley, Investment Governance Consultant, Tynans Advice
• Brett Sanders, Chief Executive, Philo Capital Advisers
• Kellie Treweek, Senior Adviser, Logiro
• Mark Smith, Head of Elston Adviser Services, Elston Group
• Tom Schubert, Managing Partner/Portfolio Manager, Drummond Capital Partners
• Chris Mather, Head of Distribution, BT (moderator)
• Zac Leman, Head of Managed Accounts, BT.

References

1. This research was based on a number of assumptions. For more information please visit https://www.philocapital.com.au/blog/2020/5/25/the-cost-of-delay?rq=cost%20of%20delay

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