The global pandemic saw markets shift dramatically over the first quarter of 2020. In Australia, the ASX 200 and All Ordinaries indices were both over 7,000 points in January. By the end of March, as the impact of COVID-19 was felt across world stock markets, both indices had dropped to just over 5,000, with a decline of over 20% in March alone.
For advisers and model managers, being able to respond quickly to these changes can mitigate risks to the practice and importantly help preserve the value of client portfolios.
The great challenge is to implement investment changes swiftly and at scale, whilst simultaneously meeting all the required compliance and administration tasks needed to make portfolio changes and keep the investor informed.
This is where managed accounts can really help. In a managed account structure—for example, an SMA—the adviser or model manager has the delegated authority to make investment decisions on behalf of their investor, which removes the need to complete a record of advice for every portfolio change. This allows trades to be executed automatically and applied at the same time for any client associated with that managed account portfolio. This is particularly important for periods of market volatility where delays in applying a recommended portfolio change can impact the overall performance of the portfolio or risk the lag of remaining invested in an underperforming asset. Importantly, it means all clients in a similar segment have the same experience making communication of portfolio changes more efficient and effective.
The benefits of this approach are apparent when looking at recent trading volumes. The number of trades undertaken on managed account portfolios on the Praemium platform increased by 120% in March 2020, relative to the average trading volumes of previous months. This resulted in a 10% reduction in allocation to Australian Equities (averaged across all managed account portfolios) with Cash up by 35% and Alternatives up by 20%, with much of this being an allocation in Gold. This is only a snapshot in time and activity would have varied depending on the investment strategy adopted. Notably there was a shift back into risk assets in the subsequent market rebound.
To replicate the same level of portfolio changes outside of a managed account, an adviser would have to complete a record of advice (ROA) for every change, send it to each client, field any potential calls or queries about the recommendation, chase up signed ROAs and then implement the trades. This could easily take days to achieve given it needs to be done for every client. Compare this to a managed account where the trade can be placed automatically and each client impacted can be updated via a digital investor portal with full transparency of the changes made.
Considering the market rebounded during May and June, advisers could potentially have undertaken a similar exercise eight weeks later.
In times of market volatility, having the ability to decide on portfolio changes and implement them in a timely, effective and efficient way, gives advisers more time to focus on client engagement and communicating with clients at a time when they most likely need it. It also demonstrates to the client the value the adviser provides. The reduction in risk and compliance burden to the advice practice, and the increase in efficiencies achieved as a result of using managed accounts, are significant. Given global stock markets are likely to be uncertain for some time, these benefits have the potential to be a real differentiator for those practices embracing managed accounts.