by Patric Roth
Separately managed accounts (SMA) or individually managed accounts (IMA) are investment vehicles similar to a mutual fund. Sitting at the intersection of advisory and discretionary businesses, managed accounts have regained popularity since the 2008 financial crisis when investors turned from hedge funds to “safer” managed account – a portfolio made of individual assets, securities, other managed accounts or mutual funds held in the investor account but managed by a highly skilled investment manager.
SMA services providers highlight the following key advantages:
This is made possible by the mutualisation of fees charged by third-party providers such as brokers or custodians. Compared to a hedge fund, the fact that a Net asset value (NAV) doesn’t need to be calculated, translates into reduced operational costs. Depending on the jurisdiction, it could also become a tax efficient investment (portfolios are rebalanced according to tax optimisation rules). Having easy access to the funds has become a priority for clients. Managed accounts provide access to liquidity in a reasonable timeframe (daily redemption when available or 3 days turn over). The possibility of choosing its service provider and investment manager, reducing the risk, tailoring the investment to the client requirements and monitoring the value and the performance of the investment makes the product attractive and very flexible. Through this, managed accounts are perceived as more transparent to the investor. Lastly, the managed account services provider governance structure is different to a hedge fund. Conflict of interest, liquidity and control over assets are under the responsibility of the holder itself or the third-party running the product. This governance model is recognised positively by the investor and tends to reduce the risk of fraud or over exposure.
On a less positive note, the main limitation is related to the managed account platform provider. The platform provider might restrict the list of approved assets to those considered “suitable”, which might be limiting the investment universe made available to investors. For example, the platform provider might curb access to Over-The-Counter products or illiquid securities (or even entire markets). Pricing policies of the platform might also conflict with internal pricing policies making the product less attractive.
All major financial institutions operating in the market offer managed accounts to their clients through their advisors and private bankers (e.g. BNP, UBS, BTFG or HSBC). These managed account offerings are of many flavours and the investor gets access to multiple providers through multiple platforms. Smaller players are attracting Ultra high net worth individual (UHNW) clients through a similar offering. This has been made possible by easy and cost-efficient access to technology. Becoming a managed account platform provider has also become simpler through technological and structural changes making the pricing very attractive for all stakeholders.
A typical structure for providing managed account services would look like this diagram.
The platform provider plays a central role in the investment scheme by giving investors access to multiple SMA providers. The investors benefit from optimised pricing on shared third-party services. It’s up to the managed account manager to define what products would be accessible and to which segment of the market. The managed account becomes a very simple but diversified and professionally managed investment vehicle. A typical investment cycle into a SMA could be represented in the following way.
The client’s initial investment in the SMA is advised by the banker or financial adviser. The investment in the underlying assets becomes a pure discretionary exercise under the control of the managed account governance body (in the boundaries of the disclosed fact sheet of the product). Once fully invested, the underlying assets are owned by the investor.
As a platform provider, the challenge is not only to ensure the best agreement with third party providers but also to invest in scalable and adaptive technologies. The platform must be able to evolve as fast as the business requires it, to ensure the transparency and comprehensive reporting functionalities (cash validation / exposure management / consolidation performance reporting including benchmarking / tax optimisation / cross border reporting). Business and software development agility is the right answer to such rapid changing market conditions and regulatory obligations.
Managed accounts provide financial advisers with a way to keep engaged with their clients by creating customised offers that a mutual fund or a hedge fund couldn’t offer. It’s a way for the advisory business to simply interact with the products and put the client as their only preoccupation.
Orbium is the consultancy company that can help any financial institution to connect the dots between the business and technology to make managed accounts accessible to any type of institutions for any type of clients. In recent years, the company has gained expertise in building scalable technical solutions coupled with optimised operational processes bringing Orbium’s clients a seamless user experience while enabling their business to grow.