The story behind the evolution of managed accounts

Toby Potter
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Toby Potter, the chair and one of the founders of the Institute of Managed Account Providers, probably has more experience in this growing part of the industry than anyone in Australia. He founded, just over 10 years ago, what became the recently listed Managed Accounts Ltd and  developed what is now a portfolio of more than $1 billion in managed accounts for the Shadforth Financial Group and Western Pacific dealer groups, part of SFG Australia, which is in the process of  being acquired by IOOF. He spoke to Greg Bright about the journey managed accounts have taken and their likely future.

When Toby Potter joined the former InvestorWeb Ltd (IWL) in 2001, the company had already been through a roller coaster ride due to the tech boom. At one stage at the height of the bubble, it had a P:E multiple of about 100 times. By 2001, though, IWL had come back to earth, but, thanks to actual earnings, it had a relatively soft landing compared with other companies of its likeness.

IWL, run by Otto Buttula, was a pioneer of online managed funds and stock research and investment trading. It had acquired the planner systems company Visy and broker advisory firm Sanfords. It also owned part of Anton Tagliaferro’s value equities shop, Investors Mutual, which later negotiated a better long-term home for itself at Treasury Group.

Toby Potter joined IWL, from Morningstar, as COO of the research arm. He noticed fairly quickly that while selling research to financial planners was not an easy task, what planners seem to value most – but paid very little for – was the model portfolios delivered as part of the research package. He thought there must be a better business model.

“I thought,” Potter recalls, “that we were very well placed to get into the emergent MDA (managed discretionary accounts) business, which ASIC had just put out a discussion paper on. We had the pool of advisors, through Visy, the research through Investorweb and the broking arm to execute and we were ideally placed to monetize what we were doing. But I couldn’t get the rest of the company over the line. So I left IWL  and set up Model Portfolios Pty Ltd.”

After building the legal structure, the two key components needed for the new small business were a technology provider –FMC, which became SS&C – and a custodian –ANZ Custodians.

Model Portfolios landed its first wholesale client, Hyperion, then run by Manny Pohl, which delivered about 150 investor clients. It was on its way. The firm grew over the next few years, with other big clients including Grove Financial Services and reached Managed Account assets and FUA of just over $2 billion by 2009.

The company had changed its name to Investment Administration Services (IAS) and taken on new equity investors. With the advice market still struggling to understand Managed Accounts, IAS still had not reached critical mass at that stage and Potter had a difference of opinion on the future development and left the business. IAS has since listed under a new name Managed Accounts Holdings .

Potter did some consulting work in the space, including for the listed Snowball Group, which needed help with its equities book and then to develop its platforms strategy. He started to build the MDA business and then, in 2011, Snowball was taken over by Shadforth Financial Group Holdings via a backdoor listing. After the initial integration of the two businesses, Potter was appointed to the permanent role as Head of Platforms and SFG grasped the potential that the Managed Account structures offered for efficiency and improved customer experience. In less than 12 months the Shadforth and Western Pacific advisers have built a Managed Accounts book of about 4,000 accounts, totaling more than $1 billion.

Now in the wider market, the big platform providers, such as BT Financial Group and Colonial, have pretty much cemented a rosy future for the Managed Accounts sector by embracing Managed Accounts in various forms in their platform upgrades and new business development. For instance, BT has said that a Managed Accounts capability would be among the early deliverables for its new wrap platform, Panorama. And Colonial has rolled out an SMA version using Colonial’s Wrap platform for its CBA Private Banking clients.

“These are big markers,” Potter says. “So, the main institutions are now using it. If you were starting an advice business from scratch, this is what you’d do. Unit trusts were really a solution for the 1970s and 80s. The lesson from the past 15-or-so years is that technology has enabled advisers to deliver a better client outcome in a systematic way.”

There are two main or “core” structures for managed accounts used in Australia. In theory, they can both do much the same as the other. In practice, however, they tend to suit slightly different styles of advisors, Potter says. They are: MDAs, which have their own Class Order and were ‘created’ by ASIC in 2004. There are up to 200 advisory businesses which have the AFSL to offer this type of service, Potter estimates. The other type is an SMA (separately managed account) which is like a managed investment scheme without a unit price. It is the structure generally used by providers such as OneVue, Hub24 and Praemium. Both MDAs and SMAs have the core capabilities of allowing the investment manager the discretion to make stock selection decisions, giving the client beneficial ownership over the securities and working well in both super and non-super environments. The differences between them would be lost on clients.

Potter says that there are several drivers for the expected growth in the managed accounts sector, which he estimates at already roughly twice the size of the ETF market in Australia ($11.5 billion for ETFs and he estimates more than $20 billion for managed accounts).

On the supply side, technology has made managed accounts accessible for small investments and technological advances will continue. Also, a lot of fund managers are now prepared to offer managed accounts. Potter believes there are more than 80 “reputable” managers currently doing so.

As FoFA has  resulted in the banning of commissions and rebates Managed Accounts have been seen by many advice groups as a way of delivering service without conflicted revenue. Also, the new rule around acting in the “best interest” of the client, is simpler to administer in a managed account because the fund manager picks up this responsibility after the client has been initially advised. Finally, there is the increased efficiency due to reduced costs and the capacity of providing better service with more frequent communications with the client.

“The key point about advisers adopting Managed Accounts is not the operating efficiencies or the fee for service model of  investment revenue– although they do offer these benefits” said Potter. “To make best use of them they offer a fundamentally different  way of delivering an advice and investment management service offer.”

“In a well constructed Managed Accounts offer Investment Managers manage, Advisers advise and Administrators administer. It’s the end of the old days of advice as a cottage industry where advisers and dealer groups run subscale investment or administration services. It’s the death of that portfolio management tool Excel.”

The sector’s association, IMAP, provides education, information and representation on behalf of managed account providers. It runs master classes and roadshows. The next master class covers the responsibilities of MDA Responsible Managers, taking place in September.

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