The State of the MDA Market

By Jayson Forrest - Managing Editor  - IMAP Perspectives

David Wright, CEO Zenith Research and Toby Potter, Chair IMAP discuss the state of the managed accounts market, as the industry rides out the COVID-19 pandemic.

 Despite the slow period of growth of the managed accounts sector in the first half of 2019, due to uncertainty surrounding the Hayne Royal Commission, once the recommendations were handed down, the growth in managed accounts grew rapidly.

This was one of the key findings to emerge from the December 2019 IMAP/Milliman managed account FUM census, which recorded a 27.6 per cent year-on-year growth, with the sector now standing at $79.3 billion.

 “This total represents about 10 per cent of the total platform market,” said IMAP Chair, Toby Potter. “The SMA/MIS category is currently recording the fastest growth at 35.6 per cent over the past 12 months, while MDAs remain the largest pool of assets at $31.1 billion.”

Addressing an IMAP webinar on ‘The State of the Managed Accounts Market’, Potter conceded the current volatility in markets, as a result of the COVID-19 pandemic, will continue to challenge markets in the months ahead, which may impact the short-term growth of the managed accounts sector.

However, according to Zenith Investment Partners chief executive officer, David Wright, the managed accounts structure is working well in the current market environment.

“Throughout the coronavirus pandemic and the subsequent market volatility, managed accounts have enabled portfolio changes to be made when required,” he said. “This includes switching or removing fund managers out of portfolios, although most portfolio activity has been around rebalancing.”

Wright added that when equity markets are down 30-35 per cent, portfolios across the risk profiles have become unbalanced, with defensive allocations being overweight and growth assets being predominantly underweight.

“This means portfolios have needed to be rebalanced. Many advisers have commented that they would not have been able to properly manage their clients’ portfolios during these volatile times, had it not been for a managed account structure.” 

Throughout this uncertain period, Wright said the managed account structure had enabled businesses to communicate more effectively with clients, rather than having to deal with each client separately.

“Transparency and communication are absolutely essential during periods of market downturn,” Wright said. “You need to be able to explain to investors what’s happening in their portfolio. Managed accounts are ideal for providing up-to-date reporting across all client portfolios, which provides investors with the confidence of knowing their portfolios are being properly managed.”

Wright added that managed accounts are also ideal for ensuring that all clients in portfolios are treated equally and experience the same portfolio management and/or rebalancing.

“This means that no client is ever left behind,” he said.

However, Wright conceded that platforms were under volume pressure during this volatile period, and while the actual trading/execution had been laborious, portfolio changes had been executed - particularly for portfolios consisting of managed investments.

But what concerned Wright was the fact that not all platform trading was completely automated, and with more people working from home during this period of self-isolation, he said there was the potential for human error to creep in as part of this process.

Some of the key developments in managed accounts that Zenith Investment Partners has noticed recently include:

• A strong demand for lower cost portfolios that are not completely passive;
• Increasing demand for dedicated retirement/drawdown portfolios;

A demand for investment consulting portfolio services, which always increase following market corrections; and

• The potential to lower the investment cost via access to lower priced unit classes or rebates for the volume invested.

“When it comes to volume, we’re seeing managers receptive to fee negotiation, and the majority of that has come by way of a rebate arrangement,” Wright said.

He added that about 10 per cent of managers had created a dedicated unit class for managed account investment, which has the added benefits of: a lower price, is simpler from an administration perspective for platforms, and is easier to understand for investors.

“I believe the availability of lower priced unit classes will be the way the industry goes in the future,” Wright said

When it comes to general market observations during the current period of market volatility, Wright said buy/sell spreads had widened significantly on fixed income funds, including ETFs, as the market suffers liquidity challenges with investors selling. However, despite that sell spread, he said it was still important to rebalance portfolios.

Another observation Wright made was with alternative strategies, which he said had provided portfolios with some protection, as alternatives had fallen less than equity markets.

As a final observation, Wright said he had noticed concern from advisers that the ‘value’ style of investing hadn’t worked during the current market downturn. He said this concern was “normal”, given the initial indiscriminate panic selling that affects all investment styles.

“Value will work over the longer term, as investors identify those investments that are backed by strong earnings,” he said. “Stocks that are able to retain their earnings will be highly sought after.”

As a provider of managed accounts, Wright admits to having learnt a thing or two since offering managed accounts as an investment solution at Zenith.

“The first thing is that the managed accounts sector is evolving quickly,” Wright said. “And the second key thing I’ve learnt is that each of the platforms have quite different trading and execution processes and protocols. Some platforms even allow for small trades to be made without letting the model manager know. That’s a concern.”

Toby Potter provided an update on the current regulatory issues facing the managed accounts sector. The following is a brief rundown.

• 1. MDA Review

ASIC has announced that it is putting the MDA Review on the ‘back-burner’, due to time constraints.

“As a result, we don’t expect much to happen over the next 6-12 months,” Potter said. “We don’t believe ASIC has found any cause to take immediate action on managed accounts, so the regulator doesn’t believe regulatory change is imperative for this sector.”

2. FASEA Code of Ethics

Potter confirmed that IMAP has had good engagement with FASEA, particularly in respect to Standard 3: You must not advise, refer or act in any other manner where you have a conflict of interest or duty.

3. Compensation Scheme of Last Resort

The Compensation Scheme of Last Resort (CSLR) is a back-stop that ensures that people who have been the victims of financial misconduct and lost out through no fault of their own, can be compensated when the financial firm is unable to pay. The scheme was a recommendation from the Hayne Royal Commission. It will be funded by the industry and administered by the Australian Financial Complaints Authority (AFCA).

Potter said he expected to see a lot of CSLR claims as a result of the market turmoil over recent months, adding that the CSLR had the potential to be extremely expensive for the industry.

4. RG 97 Disclosing fees and costs in PDSs and periodic statements

This comes into effect on 20 September 2020.

5. Design and Distribution Obligations

This comes into effect in April 2021.