Skip to navigationSkip to contentSkip to footerHelp using this website - Accessibility statement
Today's Paper
The industry is plagued by a dearth of available and comparative performance data, while it’s often not clear how portfolio fees are divided between parties.
It’s a rapidly growing area of the nation’s investment market that is rife with potential and real conflicts of interest, and often lacking in fee transparency.
Another part of the investments landscape where a scandal is waiting to happen perhaps? And with annual average growth of about 24 per cent since 2019 in funds housed in these products, it has already piqued the interest of the corporate regulator.
ASIC commissioner Alan Kirkland has acknowledged managed accounts are playing an ever-increasing role in the nation’s investment landscape.
Add in potential financial market volatility from US President Donald Trump’s Friday/Saturday military raid on Venezuela and any related aftershocks, whether short-term or otherwise, and it makes for an action-packed period ahead for investments.
The aforementioned growth relates to Australia’s managed account sector which had swelled to $256.2 billion at June 30, more than three times the almost $80 billion balance in mid-2020, according to figures compiled by the Institute of Managed Account Professionals.
The same data shows much of the recent rampant growth has come from separately managed accounts.
Adding to those factors, the managed account industry is plagued by a dearth of available and comparative performance data, while it is often not clear how portfolio management fees are divided between parties involved in the provision of the product.
That means many end customers will find it difficult to ascertain whether investing through a separately managed account is actually serving their interests.
An ASIC spokesman told this column the regulator had started a surveillance program focused on licensees that recommend and provide managed accounts to retail clients.
“ASIC wants to better understand what these dynamics mean,” he said.
“What is driving these changes, what the impacts are, and the influence of different incentives are key to ASIC’s interest.
“Our surveillance will consider compliance with the general licensee and advice conduct obligations, and focus on governance frameworks, management of conflicts of interest, and outcomes for consumers.”
The probe has included ASIC requesting reams of information from providers including customer files and commercial and marketing arrangements.
In an October speech, ASIC commissioner Alan Kirkland acknowledged managed accounts were playing an ever-increasing role in the investment landscape.
“Managed accounts can be very attractive for licensees at all parts of the product manufacturing and distribution value chain. So, we’ll be looking at what conflicts may arise, what challenges they may present and how they are being managed,” he said at the time.
Kirkland also reminded financial advisers of their obligations to act in the best interests of their customers and provide “appropriate advice”.
To their credit, players within the managed account industry – led by Adviser Ratings – came together to standardise separately managed account data and fee reporting. They launched the SMA Reporting Standard in April.
The initiative, initially focused on fees, is a good first step in addressing some of the aforementioned issues. But a lot more work is required.
Adviser Ratings’ managing director Angus Woods told this column: “There is recognition, especially recently, that if the industry doesn’t resolve transparency and standardisation, the regulator will.”
“Given many research houses now own SMAs/managed accounts there are few ‘players’ in wealth that have industry-wide trust at present.”
The SMA Standard has also set up an external committee chaired by UNSW finance professor Jerry Parwada.
“We believe that the regulators’ reinvigorated attention to conflicts in the managed investments sector following recent debacles sets the right tone regarding how seriously industry should engage with the issues,” Parwada said.
“For a long time now, SMA providers have embraced the notion that it is best to be on the front foot with not only contributing to the development of the standard, but actively engaging with data transparency initiatives built around it.
“The elephant in the room is the question of how the industry can guard against conflicts of interest around data transparency without the regulators enforcing the standard? As a committee, we bring the independence of the university sector.”
The industry is also working through issues such as the protection of proprietary information and data security.
ASIC’s focus on managed accounts comes as the domestic market continues to reel from the respective collapses of two questionable investment schemes, the Shield Master Trust and First Guardian, which put more than $1 billion in retirement savings at risk.
Those events have regulators on alert and industry participants in that part of the market on edge, including investment platforms that housed the now defunct schemes. And rightly so: the collapses have prompted increased scrutiny of sales practices related to managed investment schemes – essentially where investor funds are pooled together and ploughed into a range of underlying assets – and the due diligence undertaken by the platforms before they added the schemes.
On the back of that, King & Wood Mallesons partner Stephen Jaggers has drawn potential parallels between the Shield and First Guardian imbroglios and conflicts of interest in the separately managed account market.
“While Shield and First Guardian did not involve SMAs (and the probe is unrelated), a number of the conflict of interest issues highlighted in those cases may be relevant to SMA products,” he said in an article last month. “Trustees of SMA products should now be reviewing the distribution arrangements for those products in preparing to respond to ASIC’s probe.”
Those points also hark back to the 2019 final report by the royal commission into misconduct in the banking and financial services industry. It called out that poor financial advice was too often the result of conflicts of interest within the industry.
“Other professions are not so pervaded by conflicts of interest and do not have such a high tolerance for the continued existence of conflicts,” the report said.
Opaque fee arrangements, inducements and vertical integration were pervading issues at the time.
One industry observer, speaking anonymously to enable more frank comments, told this column: “It seems that the system is far worse today than prior to the royal commission. And it is likely the very thing that has created an opportunity for shonky operators like Shield and Guardian to exist.”
Certainly, the financial advice and planning industry wants to avoid another royal commission that dangerously hollows out adviser numbers.
It’s key that ASIC moves quickly to understand the dynamics here after a spate of industry players bulked up to cash in on the bumper inflows the managed account sector has experienced.
Exchange-traded funds giant Betashares last year pushed further into the managed account industry through the acquisition of portfolio management and investment consultancy InvestSense. The marriage saw the formation of a new entity called Trellia Wealth Partners.
Meanwhile, Grant Hackett-led Generation Development Group, which already owned Lonsec, made an even bigger bet on the sector last year. The ASX-listed group snapped up investment firm and managed account provider Evidentia and is banking on expectations of growth of 15 per cent per annum in the nation’s managed accounts industry.
On making the acquisition, Hackett cited expectations the sector would approach $500 billion by 2030 and in his view eventually top $1 trillion. Generation flagged it would split out Lonsec’s funds research unit and combine Evidentia and Lonsec’s managed accounts operations.
ASIC’s surveillance within the managed account sector presents a clear opportunity for players in the industry to clean up their act, before regulators start wielding a big stick.
No comments added.