Managed accounts are exploding in popularity due to the clear advantages they offer licensees and their clients, but leading investment research house Lonsec has warned that advisers are gambling with their business if they don’t address potential and actual conflicts associated with in-house managed account products.
According to Lonsec, advisers must look for ways to harness the benefits of managed accounts while avoiding perceived conflicts that fall short of community expectations or risk attracting regulatory scrutiny.“
Managed accounts have the potential to create significant efficiency gains and improve investment outcomes for advice clients,” said Lonsec Head of Wealth Management Sales Tony Nejasmic. “But if advisers don’t properly address the how and why of managed accounts, they risk creating a conflict trap that puts their entire business at risk.”
Current best practice suggests that embracing managed accounts is appropriate for many clients but must be done with the client’s best interests in mind. Fundamentally this means asking some hard questions about the adviser’s investment capabilities, fee structure, and governance framework.
An empowered ASIC is taking a serious look at how the advice industry is using managed accounts, while there has been a dramatic shift in community expectations following the Royal Commission into Misconduct in the Financial Services Industry.
“The test is to picture yourself before the regulator and ask yourself if you have a clear justification for placing the majority of your clients’ funds in your own managed account products. If you’re unsure of the answer, then you’re likely not offering the best value for your clients and you’re likely not fulfilling your best interest duty.”
According to Lonsec it is essential that managed accounts are used for efficiency purposes, do not involve additional fees, are free of perceived conflicts, and utilise professional investment managers in the construction of portfolios.“
For many advisers, outsourcing the investment process to a professional manager like Lonsec is the logical approach. Lonsec is also in the market to acquire investment management rights from those groups who wish to “de-conflict” their business, said Mr Nejasmic.“
This allows them to focus on strategic investment advice that meets their client’s objectives and not trying to be both Financial Adviser and Investment Manager at the same time”.