Managed Accounts 101

posted on December 29th, 2014 by Bellmont Research Team

alpha & beta

Summertime in Australia, hot weather – the beach, holidays, and like it or not, cricket. Its hard to escape cricket during the Australian summer. Turn on the TV and channel 9 will be beaming hours of international cricket. Still want more? Switch over to channel 10 and every night during the school holidays you can get your fill of Twenty20 cricket. Turn on your radio and you will be greeted by the ageless ABC commentary team (albeit without Kerry O’Keefe). Don’t like the ABC team? You can now switch to a Fairfax station for a change in voices, and inevitably there will be a headline (or multiple) in every newspaper around the country about Michael Clarke.

For many the game of cricket is seriously confusing – long leg, silly point, short leg, a maiden (are we talking sport or medieval England?) The same look of confusion greets me when discussing Managed Accounts. Separately Managed Accounts, Individually Managed Accounts, Managed Discretionary Accounts? Thankfully it is a much easier proposition explaining Managed Accounts than explaining the intricacies of cricket. In this short article I would like to offer my take on Managed Accounts 101 to help remove the confusion surrounding this ever growing space in the Australian investment market.

Managed Accounts 101

Traditionally investors have had two choices when building an investment portfolio. Invest in assets directly (Australian Shares, international shares, bonds, property, etc) or invest in managed funds (and more recently exchanged traded funds ETFs) which provide exposure to those assets.

Direct ownership of assets provides greater control, transparency and tax efficiency but is restrictive due to costs, paperwork, and the large amount of money required. Managed funds have provided investors with a simple, scalable and cost effective way to invest in a broad range of assets, but at the cost of direct ownership, transparency and tax effectiveness.

Managed Accounts are a combination of both. They offer the simplicity and scalability of managed funds, with the ownership, tax-effectiveness and transparency of a direct investing; providing investors and advisers with a superior way to gain exposure to a range of investments.

 

managed accounts matrix

 

Much like cricket the terminology of managed accounts is where there seems to be confusion. Managed Accounts is a collective term for the three prominent structures:

Separately Managed Accounts (SMAs)
Individually Managed Accounts (IMAs)
Managed Discretionary Accounts (MDAs)

managed accounts

Benefits of Managed Accounts

Before discussing the difference between each structure it is best to first understand the key benefits of managed accounts. These include:

Ownership of assets

The investor owns the underlying assets. In Australia this is primarily through a custodian structure where the investor retains beneficial ownership through the custodian. As the beneficial owner of the underlying assets investors receive all dividends, franking credits and distributions. This is in contrast to managed funds where the fund receives all payments and the fund manager has discretion over what gets distributed to investors. During the GFC a number of managed funds stopped distributions and even ceased redemptions in their funds trapping many investors.

Transparency

As the owner of the assets the investor has complete transparency of their investment, unlike a managed fund where the investor owns a unit in the fund and is kept in the dark about what underlying holdings the fund has or what transactions have taken place. Investors in managed accounts receive 24/7 online access to their investments. For example the investor can see that they own 500 Woolworths shares and can keep track of all the transactions the portfolio manager makes.

Tax efficient

Managed Accounts are not pooled investments as each investor is the underlying owner of the assets. This means that investors’ do not inherit existing capital gains as is the case with managed funds. It’s the investors individual tax position that determines the tax outcome of their investment. This allows the investor the flexibility to plan their optimal tax outcome. There are subtle variations on how this works between each type of managed account.

Ease of administration

The custodian structure removes the hassle of paperwork for investors. All contract notes, holding statements, dividend statements, corporate actions etc are handled by the custodian and reported directly to the investors’ online account.

At the end of each financial year the investor is provided with an audited tax report.

Portability

As the investor is the beneficial owner of the assets these assets can be moved to other accounts without the need to sell down. For example if an investor has an Australian Shares SMA they can transfer their shares from the SMA to their own share trading account without triggering capital gains tax. Unlike a managed fund where the investor would be required to sell down all their holdings, incurring added transaction costs and triggering capital gains tax. Managed Accounts provides the investor with greater control of their investments which leads to greater peace of mind.

SMA vs IMA vs MDA

With an understanding of the key benefits lets explore the the difference between the three prominent managed account structures. In this section I am going to stick to the basics and provide a brief overview rather the delve into the complexities of each structure and licensing – thats another article for another time. You wouldn’t try to explain a googly (yes this is a cricket term not a search engine) to someone watching the game of cricket for the first time.

An SMA is an investment based on a ‘model portfolio’ that is managed by a professional investment manager. In Australia SMA’s are primarily offered on Australian shares. The investment manager determines which shares are included and the weighting of each share and sets the model portfolio accordingly. Each investor will invest in the same shares, but will have slightly different values depending on what price the shares were on the day they invested.

As all investors receive the model portfolio the benefit of an SMA is that they are cost effective in terms of fees, transactions and have much lower investment minimums tending to start from as low as $25,000. At Bellmont we offer our portfolios through an SMA structure.

An IMA has much greater flexibility and can be fully tailored to each individual investor’s needs. As an example, If an investor wants to have greater exposure to environmentally conscious investments the IMA can be customised specifically for the investor to include greater weighting in those desired investments. With greater customisation comes greater cost and much larger investment minimums.

Managed Discretionary Accounts (MDAs) are a combination of IMAs and SMAs however the major difference being they operate under a different licensing structure which requires the operator of an MDA to hold an Australian Financial Service Licence with MDA capabilities. The reason for this is that an MDA operator not only takes on responsibility of the investment selection but also controls the custody of the assets. Investors are also not required to approve changes to the investment selection, providing the investment manager with much greater discretion

It is also worthwhile touching on Unified Managed Accounts (UMAs). A UMA is best understood as a platform where all assets are held. They provide a single overview of all the investor’s investments including SMAs, IMA’s, term deposits, cash, property, and a range of other assets classes.

Summary

Managed accounts are a welcome addition to the Australian investment landscape, enabling investors direct ownership, greater control and better tax outcomes. Like those who are new to the game of cricket it can be confusing at first. I hope however that this article has provided clarity surrounding managed accounts and can be used as a base for further investigation.

If you have any questions feel free to contact Simon on 1300 368 295 or [email protected]

 



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