Over the years, there has been much developments with managed accounts, and with it has brought on a myriad of terminology and acronyms that unlike the firm ‘legally defined’ boundaries of a ‘unit trust’, the boundaries and differentiations are somewhat less rigid, and in many cases overlap. Many have been confused by this, which has also been compounded with proprietary uses of terms for marketing or product and service naming. However in recent times, there does appear to be some gravitation to some generally accepted terms with managed accounts, and below is my best way to help a new comer best understand and differentiate managed account terminology.

I also have included some observations about the evolution of managed accounts and where they appear to be heading.

So what is a ‘managed account’

When I was part of the founding group of the Australian Institute of Managed Account Providers in around 2010, we actually spent about 9 months coming to an agreed definition of what a ‘managed account’ is, and we settled on something like:

‘A managed account is an investment portfolio proposition that is professionally managed and has clearly segregated portfolio holdings for each investor’

Under this umbrella definition there are however some key identifying aspects that differentiate different types of managed accounts. Some of the main differentiators are:

and the terminology associated with various managed account offers after referred to as:

Each of these are described below and you can click on the links above for quick reference.

I also attach in this post:

Comments and corrections welcome.. Enjoy !

Stuart

Vanilla vs Mass Customised and Personalised Managed Accounts

As managed accounts (and the technology to support their operation) have developed over the years, it has been recognised that there are benefits for investors if they can provide some level of instruction over the way the portfolio is managed. For example they may be sitting on an unrealised capital gain in an investment security within their portfolio and they do not want to sell it to have to realise a tax gain with tax payable. They also may not want to invest in various securities as they may have personal dislikes or compliance reasons (ie cannot trade certain investments inside trading windows). So over the years we have seen the introduction of customisable managed accounts which have features that generally fall into the following categories:

  • Managed accounts with standing instructions – these are typically ones that have ‘do not buy’ and ‘do not sell’ instructions around specific investment securities and are fairly black and white in terms of rules based behaviours. These are characteristics of what are often called ‘Mass Customised’ managed accounts.
  • Managed accounts with behavioural instructions – these are typically ones that define behaviours around the operation of the managed account portfolio management and trading operations and often include rules like setting minimum trading parcel sizes.
  • Managed accounts with objective based instructions – these are typically managed accounts where objectives around specific clients situations may be set, and act as overriding styles or methods that should be considered across the board when adjusting a client portfolio. Such may be ‘only accept discounted capital gains’.

Self Held vs Custodial Held Managed Accounts

Different countries around the world have developed similar  but sometimes subtly different ways for investors to hold investment securities, and for third parties to trade on their behalf. In terms of managed accounts, a simplified way of looking at this is that there are 2 key differing models:

Self held investments – where the investment securities within a managed account are actually held legally and beneficially in the name of the investor.

This has benefits in that:

  • Investors know exactly what they own and can in most cases cease manage account services and move their investments should they wish to
  • Advisers, other intermediaries and managed account service providers are free from real or perceived conflicts

The cons of this approach though can be:

  • Investors may be subject to various investment security administrative functions in order to best hold those investments (such as appointing where dividends should be directed to)
  • Advisers may be asked by investors about such administrative matters above, distracting from high value conversations

Custodial held investments – where the investment securities are often held legally by the custodian on behalf of the managed account scheme or the investor. Custody is well established model that has been around for a long time, however as more and more technological developments occur (an even the possible introduction of blockchain technologies soon) the benefits of the safe ‘custody’ may being be diminished.

The benefits of investments held in custody can be:

  • Investment securities are held ‘safely’ by a reputable organisation and hence less risk associated with fraud, accidental loss or administrative error
  • The custodian can take care of a lot of the administrative work associated with owning the investments, as they do these for many orgnaisations as a service already

The cons of custodial services however can be:

  • That investors are put off, confused about or feel uncomfortable with their assets being held in another organisations name
  • There may be costs associated with holding investment assets in custody

Single Model vs Multiple Model Managed Accounts

A lot of managed account propositions over the years have been about managing client investments to a ‘model portfolio’ which is typically a theoretically combination of investment selection and proportional allocation. As managed accounts have become more advanced over the years, and in line with the reality that many investment specialists have a specific domain of expertise, what has happened is that many managed account offers are asset class specific (ie US Equities or Australian Hybrid Securities) and in order for investors to achieve proper diversification effects, they have wanted to have a managed account solution that makes use of multiple model portfolios. This is often achieved by either the managed account proposition:

  • Offering the ability to have several segregated single model managed account accounts, however this is often an administrative burden
  • Offering the ability to have ‘mixed model’ managed accounts where the mixing of the model portfolios is performed within the managed account structure
  • Offering the ability to have ‘models of models’ which are mixed models that also flexibly adjust their allocation based on other parameters such as desired asset allocation

Advisory vs Discretionary Managed Accounts

Generally the difference between advisory and discretionary managed accounts are that:

Advisory managed accounts require the investor to approve each adjustment to their investment portfolio. The benefits of advisory managed accounts can be

  • For investors, it allows them to retain control of the portfolio
  • For advisers, it often requires less license authorities (and even regulatory capital), is to some extent less risky (as each investor approves each portfolio adjustment) and maintains a dialogue with the investor

The cons of an advisory managed account can be:

  • For investors, they need to be contacted and apply some level of understanding of what is being proposed to be changed in their investment portfolio, and if they are unavailable then they may miss out on good trading opportunities
  • For advisers, it introduces a level of work that may be difficult to schedule and coordinate with their clients

Discretionary managed accounts enable the provider to make adjustments to the investor portfolio by having a power of discretion. The breadth of this discretion is usually outlined in the managed account description and may be broad, or narrowed to just certain decisions within a defined scope (such as only execute adjustments in line with a set investment policy). The benefits of discretionary managed accounts can be:

  • For investors, that they can ‘set and forget’ and rely on the manage account provider to make portfolio adjustments for them
  • For advisers, particular financial planners, it means that they can focus on client planning and perspective rather than detailed portfolio management functions
  • For portfolio managers and investment platforms, it can allow them to create a product or service offering without the need to liase with investors directly

The cons of discretionary managed accounts can be:

  • For investors, it means very much trusting the discretionary managed account provider to do the right thing, and they lose a level of control
  • For advisers, it means that there could be increased risk if the discretionary managed account provider (which could be them) effects adjustments to portfolios that may not go in the favour of the investor

Single vs Household Managed Accounts

As managed accounts have grown over the years, there has been a natural desire then to not only view and managed investment portfolios of pools of monies into a managed account structure, but also the desire to look at the aggregate of managed accounts across multiple different house hold accounts. This raises a number of permutations of how house hold assets can then be managed whether they be aggregated before being managed to an investment strategy, or whether each household account is managed to a strategy and then aggregated for reporting purposes, and various combinations of the above also.

Centralised vs De-Centralised Managed Accounts

Different from advisory vs discretionary which describes the client engagement model, there are also the way that managed accounts that are operated which can generally be split into:

Centralised managed accounts – where a centralised portfolio management group typically undertakes to monitor, rebalance and make adjustments to client portfolios. The pros of this approach are:

  • That there can be core skills focus by speciflist resources looking at all client portfolios
  • That there can be efficiencies of scale by having such a specialist team

The cons of this approach however are:

  • That the centralised group may be a step removed from the client relationship, and hence all decisions are more ‘product’ focussed rather than client focussed, limiting how tailored the managed account service to the investor client can be
  • Those who are responsible for the relationship with the client may be somewhat effected by the decisions of others, and have to support or defend decisions made

De-Centralised managed accounts – where essentially individual investment advisers (or their assistants) take responsibility for the delivery of the managed account service themselves. This has the pros that:

  • The service can be offered with close consultation with the investor clients
  • The adviser will be more aware of every decision made for the client portfolio

The cons of this approach are however:

  • That there may be less controls over the managed account portfolio operations and process, which may introduce compliance risks
  • That this takes time, effort and costs for advisers that may be better to focus their efforts elsewhere

It is observed that households with larger asset values are both seeking and receptive to these multiple account structures as they support asset protection, structuring and tax advantages in some cases also.

De-mystifying Managed Account Terminology

Over the years, there has been plenty of jargon and acronyms introduced associated with managed accounts, some of them defining something that is a regulatory structure (or nearly), and some describing essentially a product or service offering.

Whilst given the lack of absolute definition in many cases, below is a summary of what appears to be the best generally accepted uses of key managed account phrases:

SMA (Separately Managed Account) – SMAs arrived as the first productised managed account structures, with the benefit of each investor seeing the investments they held as a proportion of a pooled investment structure. Like all managed accounts, they provide a more transparent way of investors seeing what specific investments they own, and often the benefits of being able to port the investments out of the SMA should the investor wish. As a first entrée into managed accounts as a product, the SMA proposition was first off the rank. Many SMA’s use portfolios of listed securities, however like most managed accounts they are generally not restricted to such.

MDA (Managed Discretionary Account – Unlike SMAs that are typically within a product structure, MDAs really describe a way that a managed portfolio is operated, typically identified by the name and fact that someone has a discretionary ability to alter the clients portfolio as agreed with the investor client. MDAs are often therefore defined in regulation as the transfer of authority of discretion is something that has risk associated with it. Because MDAs are a way that a portfolio is managed, they can extend beyond model portfolio security based propositions to include areas like FX and derivative trading.

IMA (Individually Managed Account) – IMAs is a name that is derived largely from the investor experience in that it is usually an experience that is tailored around the individual client. IMA is not a legal definition in any way, and hence IMA is more a marketing term than anything that defines a product or regulated structure. Because of the phrase ‘individual’, most IMA services are therefore geared around a high level of personalisation of the experience to the client, the way that they desire to hold their assets, and are put in perspective of how a firm offers an IMA, whether advisory or discretionary. Because an IMA is tailored around an individual, and the work and judgements often associated with such, IMAs are usually for high net wort or institutional portfolio sizes. IMAs may contain broad ranges of investment securities from funds, stocks, bonds, cash, trusts etc.

UMA (Unified Managed Account) – Like an IMA, a UMA is not a term enshrined in regulation, but more a service description term. UMAs can be seen as often the extension of SMAs and IMAs together and are typically for high net work portfolios that are seeking a level of personalisation around asset allocations, with often SMA type portfolios for each asset class. Sophisticated UMAs may support the aggregation of assets from various household accounts into a blended overall portfolio with either SMA or IMA like ‘sleeves’ for more specific account / asset class portfolio management.

DFM (Discretionary Fund Manager) – The term DFM is broadly used in the UK to describe a discretionary managed investment portfolio, and in many ways can be regarded as similar to SMA or IMA operated with MDA type operations. Because of the way that these terms arrived, there is not a close correlation between them and the overlap can be confusing. Because of the tax advantages of holding assets in funds in the UK, DFM portfolios are often portfolios of underlying managed funds although can contain securities, bonds and other instruments also. DFM providers typically serve the higher end of the market with a more personalised approach, although many have started MPS offerings (see below) for the broader market. DFM solutions have some advantages of ‘Fund of Fund’ propositions in that they provide a more descriptive and transparent experience for the consumer and adviser.

MPS (Managed Portfolio Services) – MPS services in the UK are generally DFM services that typically have little or no level of personalisation but manage an investment portfolio to a set model portfolio mandate of funds or securities.

‘Rep-as-PM’ – is a term used in the USA where a representative of a firm manages an investor portfolio directly rather than putting the client into a more productised alternative like an SMA. Rep-as-PM as a proposition has grown considerably over the years as it allows a more direct adviser to client relationship and also reduces the necessity of product structures (like for SMAs) allowing more margin to go into an advice firm as opposed to third party product providers.

 

Comparison of Different Managed Account Types

Below is a table with a best comparison of managed account types. Clearly this is not a ‘black and white’ landscape..

 

The Managed Accounts Journey

Managed accounts have developed through the introduction and advancement of technology, and with that advancement, the type and nature of managed account offers has developed, evolved and transformed. Below is a summary diagram of the key developmental paths that we have observed managed accounts evolve.

One of the key barriers in the development of managed accounts is the transition from a ‘product’ mentality in their operation to the more recent managed account offers that operate with a high degree of ‘service delivery’ to clients. This is a key evolutionary step in line with most industries that move from product focus to service focus, and create complexities for operations and technologies.