Managed accounts: help your SMSF clients understand the benefits

If your clients are considering becoming a Self-Managed Super Fund (SMSF) trustee, having an understanding of how managed accounts work, and the role they can play in an investment portfolio, may help you in providing better advice.

According to Riccardo Briganti, investment specialist, BT Financial Group, one of the main benefits of managed accounts for a SMSF trustee is that they provide more transparency than managed funds because SMSF trustees have visibility of the underlying investments within their portfolio.

“If it's an equities managed account, you will know, say, the 20 underlying stocks that make up your portfolio. In contrast, in a managed fund, the fund manager may tell you what the top ten holdings are, but are unlikely to tell you every holding that's in the fund,” Mr Briganti says.

As managed account SMSF trustees own the underlying investments, they receive all dividends and franking credits. They can also apply the SMSF's tax position to the gains or losses made through their investment in a managed account.

This contrasts with managed funds, as their returns are not affected by the SMSF's tax positions.

Managed accounts have become more popular due to availability

Russell Brinckley, national manager of product development at BT Financial Group, says although they have become mainstream recently, managed accounts have existed for many years. One of the reasons advisers are using them now is due to their many benefits and their widespread availability on modern platforms.

“At the core of every managed account is a model portfolio. This achieves efficiencies because many clients can be rebalanced against the model portfolio at the same time. Everyone receives a consistent portfolio holding, return and investment alignment to the model portfolio’s strategy, subject to any particular preferences applied to the client managed account,” Mr Brinckley says.

While the universe of managed funds is much wider than that of managed accounts, the number of managed accounts will broaden over time as the industry matures, giving SMSF trustees more flexibility and increasing the options available to them.

“Managed account investment options are expanding. Tax-effective Australian equity portfolios are an example. The objectives of portfolios like these are to give investors access to the after-tax income from the underlying ASX investments they hold, as determined by the research and disclosed strategy of the investment manager running the portfolio,” says Mr Brinckley.

Managed accounts also give SMSF trustees easy ways to implement a diversified portfolio according to their investment objectives. There are options to suit SMSF trustees in accumulation phase who want a growth portfolio, as well as those seeking income in retirement.

SMSF trustees can use managed accounts and cash to achieve their entire asset allocation. Or they can be used for only a small part of the overall portfolio. The choice will depend on the investor’s goals and preferences.

They’ve also become more popular due to changing industry dynamics, which means advice practices can become more streamlined. 

As an example, if a client's portfolio changes to respond to market conditions, there is generally no need to issue each client a statement or record of advice (SOA or ROA). The operator of the managed account generally has the authority to make investment decisions and then transact accordingly.

“This provides advisers and SMSF trustees with comfort their portfolio is aligned to the agreed investment objectives of their selected managed account. They have visibility over these transactions and transparency of the investment strategy being implemented,” says Mr Brinckley.

How managed accounts are used

They’re primarily used in two ways. The first is that they deliver access to a particular asset class like Australian equities through giving the investor exposure to a diversified basket of shares, without them having to pick individual stocks. Rather, an investment manager chooses them.

The second is that they are used in a whole-of-portfolio approach where SMSF trustees receive a diversified range of investment options and asset classes. They can also be used to access a specific investment theme, for instance assets with a growth or income bias or that follow a sustainable theme.


Next: What changes with your client's SMSF as they move into retirement
 

When your client has an SMSF, you may need to consider whether they want to continue to maintain their SMSF in retirement and how their Trust Deed is set.

This publication is current as at 12 February 2019, and has been prepared by BT Financial Group, a division of Westpac Banking Corporation ABN 33 007 457 141 AFSL 233714 (‘BTFG’), which is part of the Westpac group of companies (Westpac Group). This document has been prepared for the information of financial advisers only and must not be copied, used, reproduced or otherwise distributed or made available to any retail client or third party, or attributed to BTFG or any other company in the Westpac Group.

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