SMAs are a way of investing in equities and other listed securities while maintaining the benefits of professional management.
They are based on model portfolios, with investment decisions delegated to a professional manager, but the investor retaining ownership of the underlying securities.
Like managed funds, they are set up as a managed investment scheme to provide investors with the same protections.
The advantages of SMAs for clients, planners and dealer groups mean that SMAs are becoming more popular among planners.
Research for the JBWere/Investment Trends SMA Report found that the number of planners who are using SMAs and who intend to continue doing so has increased from 17 per cent to 20 per cent over the last five years.
Over the last year or so, the number of planners’ clients who use SMAs has increased from 15 per cent to 21 per cent. Another 23 per cent of planners say that they may start using SMAs over the next two years.
The prime drivers of this growth have been increasing investor education on financial products, combined with the substantial administrative pressures faced by financial planners as their client preferences change.
Investors are increasingly choosing full control and transparency when it comes to their retirement portfolios in particular – with assets in the SMSF segment expected to more than triple to over $2 trillion by 2033, the funds involved are huge and growing rapidly.
Financial advisers are feeling the pressure from this trend by spending more time monitoring and administering direct investments for clients.
The report found that almost half (48 per cent) of planners did not want to invest further client funds in direct equities because of the administrative burden involved in monitoring multiple individual stocks at once.
Those advisers whose clients were invested in direct equities held an average of 12 shares each, making it impossible once an adviser business reaches a certain scale to have time for quality conversations with clients.
For these advisers, SMAs presented a simple way for their clients to be invested in a transparent portfolio of equities, while outsourcing the management function to a professional, eliminating the need for statements of advice and records of advice every time a client’s portfolio changed.
Because the pressure on back-office and settlements staff is much reduced by an advice practice using SMAs, some of these employees are often redeployed as para-planners or to other revenue-generating roles.
Anecdotally, switching client equity holdings to SMAs has saved some adviser businesses up to $300,000, as well as reducing their back-office head count and costs.
SMSFs usage driving demand
Another reason planners are using SMAs with their clients is that they recognise the benefits of SMAs for their self-managed super fund (SMSF) clients.
While the SMSF sector currently holds just under a third ($193 billion) of its total assets in direct equities, just over half of planners surveyed in the report believe these clients would be better off in SMAs.
Given the tax efficiencies and convenience of outsourcing the management function, combined with a low overall management cost, it makes sense that a growing number of planners see SMAs as an ideal vehicle for investors holding direct equities through an SMSF.
Our research suggests that two key issues are holding back further growth in the SMA market – availability and education.
Despite more of the major adviser platforms adding SMAs, almost 20 per cent of potential SMA users say they don’t have one on their approved product list (APL).
A quarter (25 per cent) of planners also want more education and dealer group support around SMAs to make it easier to explain their uses and advantages to clients.
Another key area SMA providers will look at over the coming months is product development.
While the focus of most SMAs until now has been Australian equities, almost 70 per cent of potential SMA users surveyed for the report wanted access to an international equity SMA, while 45 per cent wanted to see a multi-asset SMA launched in the market.
While the potential is certainly there in this growing market, supporting advisers with access to new and innovative products, and more materials to confidently explain SMAs to clients, should boost inflows even further in the coming years.
Andrew Tracy is executive director of investment services at JBWere.
