Andrea Theouli, Deputy Head of Research & Manager, Multi-Asset, Lonsec
The Australian managed accounts market has evolved considerably over the past decade. As the sector continues to mature, the conversation is shifting from adoption to accountability. Increasingly, the factors that differentiate managed account providers extend beyond portfolio holdings and historical performance to encompass governance, portfolio construction, implementation, transparency and the ability to consistently deliver intended investor outcomes.
Drawing on observations from Lonsec’s recent dedicated SMA Review program, this series explores the continued evolution of managed accounts and shares Lonsec’s perspective on several of the themes becoming increasingly important for advisers when assessing SMA solutions.
In the first article of this series, I explored how the managed accounts market has matured beyond operational efficiency and portfolio administration. As adoption has matured, so too have adviser expectations. Increasingly, the conversation has shifted beyond historical performance towards understanding the governance, implementation and portfolio construction disciplines supporting long-term investor outcomes.
This evolution raises an important question.
If performance alone is no longer sufficient, what increasingly differentiates one managed account provider from another?
The answer is often found beyond the portfolio itself. Increasingly, the quality of governance, investment implementation, operational capability and transparency supporting portfolio decisions may be just as important as the investment decisions themselves.
Governance shapes outcomes long before markets do
Governance is often viewed through the lens of an Investment Committee, yet effective governance extends well beyond meeting schedules or committee structures. At its core, governance determines how investment decisions are made, challenged, documented and ultimately implemented. It influences whether portfolio decisions remain disciplined during periods of market stress, whether investment philosophies are consistently applied and whether decision-making can withstand organisational change. Strong governance is often difficult to identify during favourable market conditions. It is typically during periods of heightened volatility, significant drawdowns or personnel change that governance frameworks are truly tested.
Increasingly, advisers are looking beyond organisational charts to understand the broader governance culture supporting an SMA. How are differing investment views debated? Is genuine challenge encouraged? How are investment decisions documented? Does accountability sit with an individual, or is responsibility embedded within a broader framework?
Equally important is understanding key person risk. Some organisations remain highly dependent on a CIO or lead portfolio manager, while others have invested heavily in collaborative decision-making, succession planning and institutionalised investment processes. Neither model is inherently superior, however, advisers should understand where responsibility ultimately sits and how resilient those arrangements may be over time.
Governance is not simply about reducing risk. It is about improving the repeatability of investment outcomes.
Where is value really being added?
One of the more interesting developments within the managed accounts market has been the growing diversity of implementation models. Some providers manage significant portions of portfolios internally. Others rely extensively on specialist external managers. Many increasingly adopt a blended approach, combining proprietary capabilities with external expertise across different asset classes. Rather than asking whether internal or external management is preferable, a more meaningful question is where the manager believes it possesses a genuine competitive advantage. Internal capabilities may offer greater control over implementation, improved portfolio integration and potentially lower costs through economies of scale. Conversely, specialist external managers may provide access to deeper asset class expertise, broader research capabilities or investment opportunities that may be difficult to replicate internally.
Neither approach is inherently better.
Instead, advisers should understand the rationale supporting these decisions. Why has an internal capability been selected? Under what circumstances would an external specialist be preferred? How are proprietary capabilities reviewed against external alternatives? How are potential conflicts of interest managed where affiliated investment capabilities are utilised?
Increasingly, the quality of these governance decisions may be just as important as the underlying investment decisions themselves.
Sophistication should have a purpose
Portfolio construction has evolved significantly beyond traditional strategic asset allocation. Today’s managed account portfolios increasingly incorporate dynamic asset allocation, specialist investment sleeves, overlays, derivatives and ETF exposures to achieve specific portfolio objectives. These techniques can improve implementation efficiency, enhance portfolio flexibility and support more effective risk management. They also allow managers to express investment views with greater precision than has historically been possible. However, increasing sophistication should never become an objective in itself. Every additional layer of portfolio construction should serve a clearly articulated purpose that supports the portfolio’s investment philosophy and intended client outcomes. An overlay should exist because it improves implementation or manages risk – not simply because it can. Similarly, derivative strategies or specialist sleeves should have a clearly defined role within the overall portfolio architecture.
For advisers, understanding why these implementation techniques is essential. Complexity alone should not be mistaken for quality.
Good decisions still need good implementation
Investment decisions only create value if they can be implemented effectively.
As portfolios become more sophisticated, implementation capability has emerged as an increasingly important source of differentiation. Implementation extends well beyond placing trades. It encompasses portfolio rebalancing, cash management, transition management, execution discipline and the operational infrastructure required to consistently deliver model portfolios across thousands of client accounts. It also includes the interaction between managers and administration platforms. Timing differences, trading processes, cash management practices and platform functionality can all influence realised investor outcomes.
Two advisers investing in the ‘same’ model portfolio on different platforms may experience different outcomes depending on how that portfolio is implemented. This does not necessarily indicate that one platform is superior. Rather, it reinforces that implementation quality has become an increasingly important consideration alongside portfolio construction itself. As managed accounts continue to scale, operational robustness increasingly becomes part of the investment proposition rather than simply an administrative consideration.
Sophistication demands transparency
Perhaps the most significant observation arising from the continued evolution of managed accounts is that increasing sophistication must be accompanied by increasing transparency. As implementation becomes more sophisticated, the standard for transparency should increase rather than decrease.
This principle extends beyond portfolio holdings.
Advisers increasingly require a clear understanding of how portfolios are constructed, why implementation decisions are made, how investment risks are managed and what role various investment components play within the broader portfolio.
The growing use of internal capabilities, specialist investment sleeves and other portfolio management techniques makes clear communication more important than ever.
Transparency also supports confidence. It enables advisers to explain portfolio behaviour to clients, understand differences between competing SMA providers and satisfy themselves that portfolios continue to align with client objectives over time.
Ultimately, transparency should evolve alongside sophistication – not lag behind it.
Looking ahead
The continued evolution of managed accounts has highlighted that strong investment outcomes are influenced by much more than portfolio holdings or historical performance. Governance, portfolio construction, implementation and transparency all contribute to the long-term quality of an SMA solution.
For advisers, understanding these broader considerations provides greater confidence that portfolios are not only well designed but are also capable of consistently delivering on their stated objectives.
In the final article of this series, we bring these themes together by exploring why comparing managed accounts has become increasingly nuanced, and how advisers can look beyond historical returns to make more informed product comparisons.
Important Information: This article has been produced by Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL No. 421445 (Lonsec). Generation Development Group Limited ABN 90 087 334 370 is the parent company of Lonsec Research.
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