Good design can make SMAs a winner
There is no question financial advisers are increasingly turning to separately managed accounts (SMAs) as an investment vehicle of choice. As a specialist SMA provider, Ralton has been in the game for nearly a decade and we can attest to the current surge in demand.
A report from NAB and Investment Trends last month also supports this view with a finding that one in four advisers already actively use SMAs, while a further 20 per cent intend to start recommending them to clients.
Managed accounts are a win for advisers because they are a win for their clients. SMAs are professionally managed, transparent, tax efficient, directly owned and cost-efficient.
But that does not explain their sudden popularity. SMAs were all those things 10 years ago, so what’s changed?
The simple answer is the ability to efficiently administer SMAs has increased dramatically thanks largely to technology gains. Old-fashioned platforms, built off a single holder identification number (HIN) per client, were very expensive to run a direct equities portfolio through.
If a client had anything below $250,000 to invest, the costs to administer were relatively high as compared to a managed fund.
The new platforms, however, are generally structured with a single HIN or beneficial ownership structure, allow investment down to as little as $20,000 and can be administered efficiently because of new systems for dealing with corporate actions, dividend reinvestment and cash withdrawal.
It is this, plus the creation of rebalancing algorithms, which make the new generation platforms much more efficient to use for direct equities portfolios as a professional manager.
The obvious result is that suddenly SMAs make business sense from an adviser’s perspective for clients with smaller amounts to invest. They are also an ideal tool for advisers to appoint professional fund managers to invest their clients’ portfolios in a transparent, low-cost and tax-effective way that actively engages clients through the direct ownership structure.
There is one small thing to watch out for, however, and that is product design. There are a number of fundamental differences between the way an SMA should be designed and managed compared to a pooled managed fund.
SMA portfolios need to have fewer and less volatile stocks, they should have less trading in and out of positions and they must be rebalanced differently. If not managed carefully, large tracking errors can open up between SMAs and their underlying managed fund portfolio.
Put simply, the user experience of SMAs for the planner and the end investor is enhanced dramatically by using a product designed and managed for the SMA environment.
As featured in Financial Observer