Some financial advice practices have successfully implemented managed account portfolios for their clients, whilst others have continued to develop bespoke solutions for each client. Which approach is correct?
Rather than say which is correct, it is perhaps easier to say that neither is wrong, as different businesses will have different business models, designed to suit both the business itself, and the size and nature of their client base. Not surprisingly, historical advice business models were built around the need to tailor a portfolio for a client – to design what they needed, with the right mix of growth and non-growth assets, in the right markets, the right sectors and potentially with variation in product from client to client. And for some clients, this approach is still valid, and perhaps necessary. But today, the question has to be asked, is this approach right for all clients?
The Financial Planners and Advisers Code of Ethics (the Code) requires many things of advisers, one of which is to act with integrity and in the best interests of all of their clients (Standard 2). Best interests in this regard should not be read as to the suitability of a particular product. That approach, consistent with the best interests duty under section 961B of the Corporation Act, comes up under Standard 5 of the Code.
Rather, the best interest requirement under Standard 2 refers to an adviser’s “ethical behaviour”, and in this context should be regarded as asking advisers “how do you ensure that you act appropriately for all your clients?”. Or, considered in a different way, how do you ensure that if you see a relevant investment opportunity, you look at it for all your clients, not just a subset?
The use of managed accounts here provides an attractive solution. The ability to transact once to make changes to accounts for multiple clients can help an adviser to act for all their relevant clients in one go. Not only does this help in meeting Standard 2, but also greatly enhances the efficiency and effectiveness of the practice. It helps to show clients that you are thinking of them by acting when necessary, building on the Code’s value of trustworthiness. And by implementing such changes via managed accounts, the efficiency of doing all at once can only assist in demonstrating the Code’s value of diligence.
But what about the suitability of the product in the first instance, and specifically the best interests considerations that do come up under Standard 5 of the Code and Section 961B of the Corporations Act? For those who believe the individually tailored portfolio, deciding on specific investments for each separate client, is the only way to meet the best interests duty requirement, we need to remember that “best interests” is not about the singular best products on the market. Rather, it is about putting the client into a better position; forming a view that the client will be better off as a result of the advice and product recommendations than the position they would be in if they did nothing.
If a client is in need of an investment solution that allows the adviser to adjust or tilt the underlying investments based on market conditions or opportunities, then a managed account as the product recommendation is clearly in the best interests of the client. Portfolio adjustments can be undertaken quickly, without the need to provide a statement of advice in advance every time a change is warranted. This can help address implementation leakage and so benefit clients.
Brett Sanders, CEO of managed account provider Philo Capital Advisers, cites research done by his firm1 that quantifies this benefit. “In our asset allocation study, going back over 20 years with hundreds of thousands of iterations, we found that a 4-week delay in transaction implementation would see that, on average, 50% of excess return is lost and that after 3 months of delay, 80% of the benefit is foregone. Most advisers are simply not in a position to rebalance all their clients quickly enough to avoid those costs without the use of managed accounts. This is a practical reality and illustrates how managed accounts can make a powerful contribution to addressing the best interests of investors.”
Together with this, remember that Standard 5 also requires advisers to be comfortable that their clients understand the advice and products recommended. The use of a managed account, whilst adding an extra layer, may actually assist clients in understanding your recommendations. This is because they may be able understand that you will recommend a portfolio of investments for them, suited to their needs, via a managed account structure, and that the structure allows you to make tactical changes that you believe would be of benefit to them and their portfolio. After all, isn’t this why clients are coming to see their adviser in the first place? To avail themselves of the adviser’s skills, knowledge and expertise?
We hope this article provides some useful context for considering the use of managed accounts. While use of managed accounts may create incremental costs for some investors, relative to how their portfolio is invested today, there are also additional benefits that managed accounts can bring, including:
These are important ethical and compliance benefits and one of the roles of advisers is to assess the relevance of the benefits offered by managed accounts to each investor, taking into account any cost differential.
1 The Cost of Delay – How much can prompt implementation save you? Philo Capital Advisers (Freeman) 2020