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Managed accounts are increasingly taking the place of managed funds in self-managed super fund (SMSF) portfolios because they give advisers the ability to act swiftly when markets move, as well as offering tax advantages and improved transparency.
But it’s important to understand how they work, their fee structures and form a view about how they integrate with other investments in the portfolio.
Managed accounts are different to managed funds because they give investors more choice when it comes to portfolio exposures and allow them to directly invest in shares. They also mean SMSF members are the beneficial owners of the underlying assets, which can deliver tax advantages especially for pension-phase investors who don’t pay tax.
A professional investment manager is responsible for making decisions about the assets in the structure and clients don’t need to sign off on a new statement of advice every time the manager makes a change to the portfolio.
Paul Bourke, a director of ID Accounting and Wealth Solutions explains. “A managed account provides SMSF investors with an at-arm’s-length expert management team of investment professionals, which helps give investors comfort their assets are well managed. In difficult times like these it’s easy for investors to chase returns and sometimes forget the fundamentals. A managed account helps remove some of this investment bias.”
One of the main reasons managed accounts are attractive is because they enable the manager to make swift portfolio changes when markets are highly volatile as a result of variables like changing economics conditions, market shocks, company results announcements or research updates.
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“This allows the manager to make timely trades and reduces the paperwork required to obtain client consent,” explains Lane Financial senior financial adviser Morgan Collins.
Most managed accounts also boast a more regular approach to communication versus managed funds, which often only provide updates to their investors once a quarter or even once a year.
“Timely updates really help with investor confidence during rough times,” Collins adds. Typically the investment manager will send out an investor alert when something significant happens in the market, often within 48 hours, in addition to regular newsletters and insights. This gives investors assurance the investment manager has their hands on the wheel.
Michael Miller, a financial adviser with Wealth Market in the Canberra suburb of Northbourne, says his practice is watching developments in managed accounts very closely. This is because they allow investors to have more direct visibility of how their money is invested, while outsourcing the management of the portfolio when they don’t wish to do it themselves.
“This is in contrast to managed funds, where the price of outsourcing the management is very little insight as to what’s in the portfolio. Direct visibility is increasingly important for investors who want a say in which companies are in their portfolios, but don’t necessarily want to take on all aspects of managing their portfolio. Managed accounts can provide this,” he explains.
Be aware of possible downsides
Although managed accounts offer plenty of benefits, there are also potential downsides.
“Unless the portfolio is designed for a specific investor type there could be capital gains tax consequences when a portfolio changes. This could adversely affect an SMSF in the accumulation phase, although it would not have the same affect on a retirement-phase SMSF,” says Collins.
If an SMSF has segregated assets the managed account could cause accounting troubles, as the assets may not be able to be siloed for each member or member account. Tax planning is also one of the main advantages of SMSFs. A managed account could make transaction timing difficult at an individual client level.
Bourke says there are additional considerations for SMSF trustees. “A managed account does remove some of the control of asset selection and hands over decision making to an external manager. Managed accounts are also typically built for the masses and not individually constructed for your SMSF. So members have to accept they may not be ideal when blended with existing assets held within the SMSF.
So it’s essential to understand how the managed account correlates with your existing holdings. If you are seeking to maintain full control over all investment decisions within your portfolio then a managed account may not be the solution.
Miller also warns some managed accounts are constructed so they simply choose from a selection of managed funds. In this instance, he recommends developing an understanding about how fees are being charged in the portfolio.
“Managed accounts’ ability to offer increased visibility over investors’ assets while delivering the benefits of outsourcing management is one of their major benefits. So I’m not keen on managed account options entirely made up of managed funds as they don’t achieve improved transparency.”
Managed accounts in practice
Collins outlines a case study of one client who has benefitted from managed accounts.
In this case, the client wanted an exposure to ethical assets and some visibility of his investments. The challenge was creating a multi-asset portfolio with an ethical overlay without significant cost and resource allocations.
“To create the portfolio he wanted, we invested in a Vanguard ethical index fund to provide diversity and the Australian Ethical Shares SMA to deliver Aussie equity exposure. This is a good example of how a managed account can be used to complement a broader portfolio. His portfolio has performed particularly well through this period as sustainable stocks have outperformed the broader market,” says Collins.
Bourke says he uses managed accounts for clients who typically look at their shares on an annual basis and react to a review of those holdings at that time. “Once we introduced these clients to a managed account they could see the active management of their portfolio live and see the benefits of active management through volatile times such as 2020.”
Managed accounts are likely to grow in popularity and sophistication over time. While they will never completely replace managed funds, they are likely to make up a greater proportion of SMSFs’ assets over time.