Managed Discretionary Accounts Trend in SMSF Advice

At Superfund Wholesale we see many different portfolio management models being utilised by the advisers we work with. An emerging trend is towards Managed Discretionary Accounts (MDAs) which can provide significant benefits to both clients and advisers.

Traditionally with fully advised clients, the need to provide a Record of Advice (RoA) for every portfolio change tends to allow ‘inertia’ to take over the portfolio, and as a result things that should be sold often aren’t, and things that should be bought are left till ‘another day when I have more time to write the Statement of Advice / Record of Advice.

It costs advisers in terms of resourcing and staffing, and it costs clients because of missed opportunities and potentially higher transaction costs on the traditional platforms. Advisers we work with are constantly on the hunt for solutions that will save them time and enable them to provide high quality, personalised advice to their clients.

We took this opportunity to talk to some of the service providers who are helping advisers to overcome the problems associated with keeping portfolios in the right balance.

ASIC regulations are stringent in terms of trading a client’s account without the correct licences in place, as evidenced by a recent five year ban on a Macquarie adviser for ‘un-authorised discretionary trading’. Obtaining the correct licences and setting up the associated infrastructure would be out of the reach of most practices, but by partnering with the right providers, advisers can tap into portfolio efficiency at cost effective rates.

HUB24 are one of the leading technology providers in the MDA sector. We asked account manager David Leigh for comment about how advisers are using the HUB24 platform to improve efficiency.

“Good technology is an enabler, and can fundamentally change the way advice is delivered, and implemented,” said David.

“HUB24’s market leading managed portfolio capability combined with our state of the art platform implementation technology can help advisers reach a new level of efficiency. For example, a professionally managed diversified portfolio of direct shares will provide greater investment transparency for advisers and their clients, right down to the asset level.

Clients also get the benefits of direct ownership and with the help of their adviser, can have greater control over their tax outcomes, helping to minimise the CGT impact during portfolio changes.”

“Access to professional portfolio construction can lead to lower risk and better linkage between advice, product solutions and client outcomes. Implementation via the HUB24 platform means less paperwork and compliance and by netting all asset changes at an individual account level, transaction costs can be reduced. A professionally managed portfolio of shares also means an adviser doesn’t have to do the reweighting or reallocation, giving them more time to spend servicing their clients.”

The important point to make here is that HUB24 have the facility for advice groups with adequate expertise to set up an investment committee and make the key investment decisions and applying resulting changes across all clients in the specific model portfolios they’ve established.

Within that HUB24 custodial system, an adviser can also appoint managers to provide advice on discrete portfolios of shares. One of the leading providers in this segment is Lonsec.

Bill Keenan, General Manager of Equities Research had these comments on the service they provide: “Lonsec’s equity model portfolios are in increasing demand from planners looking for quality, low turnover portfolios, with a strong 15 year track record. Lonsec offers three key portfolios: Core, Income and Emerging Leaders; and all are available on HUB24 and other leading MDA platforms at a cheaper cost than traditional fund managers”.

You can obtain further information about the Lonsec Core Model Portfolio here (PDF).

Of course, the cost of platforms and payments to external managers may be something that you are trying to avoid, in order to strip out as much cost as possible for your clients. The feedback Superfund Wholesale receives from advisers is that SMSF clients are especially keen to reduce or remove that middle layer of fees.

To cater for this mindset we also spoke to Bruce Williams, Director of Elston, who have spent many years developing their ‘non-platform’ MDA service. We were particularly interested in their performance based fee structure which can provide strong correlation between portfolio performance and costs, something that clients are likely to readily engage with.

“The Elston MDA service is designed to provide direct beneficial and legal ownership of client’s assets and professional investment management based on true after-tax management of assets so the full benefits of strategic tax and planning advice can be realised” said Williams.

“As the name would suggest accounts are managed on an individual basis, providing a tailored, individual approach focussed on after-tax return catering to investors with a high sensitivity to tax, or those in beneficial tax structures such as an SMSF.

For advisers, the offering allows them to provide the type of direct investment solution demanded by high net worth and SMSF clients while enabling them to achieve scale efficiency gains within their practice. This is achieved through reducing compliance risk and costs, managing more clients with less people by reducing administration costs and time through systems and automation of reporting and corporate actions, freeing up advisers to spend more time focussing on core competencies and manage client relationships”.

Williams concluded by saying that “Practices can drive profitability and growth by eliminating platform costs and reducing investment and administration costs. This gives them the flexibility to increase advice margins at the same total cost to client or pass on savings to their clients. Technology and administration benefits allow firms to increase EBIT per SMSF client through vertical integration of systems”.

When it comes to vertical integration of systems, advisers also need to think through how their portfolio management will flow through to the clients’ accountant or SMSF administrators. There is little point managing a client’s portfolio in a more efficient and profitable way if their SMSF accounting fees skyrocket due to an increase in portfolio transactions that the local accountant may be handling manually.

Superfund Wholesale has been working with Elston for a number of years and more recently has been deeply involved in the testing and development of an automated data feed from their MDA to Class Super’s leading SMSF administration platform.

The recently activated Elston data feed provides us with daily portfolio information including trades and transactions, investment holding balances and corporate actions. Advice businesses using the Elston MDA service can tap into our complete SMSF compliance solution for only $120/per SMSF per month – which includes daily administration, annual accounts, tax lodgement, independent audit and technical support.

Just as it is with SMSF administration, by partnering with the right service MDA providers, advisers can achieve customisation that SMSF clients demand, while also being able to provide quality, sustainable, ‘industrial strength’ portfolios.

It’s all about a scalable experience for SMSF clients.

How close are we to ‘zero-touch’ SMSF administration? (Part 1)

Unless you’ve been living under a rock (or maybe a collapsed pile of Master Tax Guides), you’ll know technology is creating massive shockwaves across the accounting and wider financial services industries.

And thanks to the investment-oriented nature of SMSF accounting and administrative functions, the self-managed space has already seen significant automation. Transactional data feeds and ‘if this then that’ style coding have been speeding up laborious data input and reconciliations for years.

When used correctly, these relatively simple features (contained in many accounting software programs) can have a significant impact on efficiency. Over the past five years I’ve seen the time to complete an average set of SMSF accounts reduce significantly. And all because improved transactional data feeds and rules now automatically allocate/code a significant number of those transactions. Instead of manually dealing with every transaction, we’re now dealing only with exceptions.

But there’s still a lot of room for improvement.

The key factors that drive efficiencies are:

  1. Getting the right data into an SMSF administration platform/accounting system
  2. Dealing with the data once it’s there
  3. Getting information out of the system for stakeholders.

Getting the data in

So much data can be pushed into an accounting platform these days. Here’s a table showing what SMSF data is (and isn’t) available. (Note: This isn’t an exhaustive list.)

Table_SMSF_500px

Getting more data fed directly into an administration platform means SMSF accounts can be prepared more efficiently. It’s a relatively simple concept, but one that a significant chunk of the SMSF industry has failed to grasp.

The table comes from The SMSF Academy’s Future of SMSF Report (August 2014), which also states 40% of accountants don’t use any data automation for their SMSF clients. And why not? Because they don’t think they have the scale or resources to make it worthwhile.

Unfortunately, that means more than 5,000 businesses (based on 13,033 tax agents) risk the quality of their SMSF service delivery falling behind the rest of the market. And with business owner clients needing better service as they move into retirement, these businesses need to be paying attention more than ever.

Working with SMSF data


Getting accurate and timely data into an SMSF administration platform is one thing. Efficiently converting it into useful information for key stakeholders (members and trustees, independent auditors, the ATO and financial advisers) is another.

Because SMSFs are investment-focused entities and highly regulated, they’re subject to rigid accounting. Most assets, income, expenses and member contributions items can only be treated in a certain way. This means SMSFs are more suited to being automated than other business entities, and will feel the impact of ‘robo-accounting’ a lot sooner.

As I mentioned earlier, ‘if this then that’ transaction-based rules can automatically allocate and code a significant portion of common SMSF transactions. However, there are always gaps that need to be filled. Moving into the 2016 financial year, SuperStream will plug the gaps in employer contributions and rollovers.

Looking further into the future, it will only be a matter of time before the software property managers use will integrate data to plug the gap for rental property income and expenses. The Electronic Service Address for SuperStream may even allow SMSFs to receive remittance advices for more and more transactions.

The ATO has also said it will expand the use of its Standard Business Reporting (SBR) for more robust two-way communication between the ATO, super funds and employers. While the focus will initially be on APRA regulated funds, SuperStream shows that SMSFs aren’t immune to these changes. So the accountants working with SMSFs will either need to change, adapt and use technology to deliver a better client experience, or risk losing them completely.

There’s a second layer of automating accounting transactions. But it’s a little trickier to describe, so I’ll talk about it in our next article. I’ll also talk about how to produce useful information for the key stakeholders, and predict when zero touch SMSF accounts will become a reality.

Part 2 of this article is available here: How close are we to ‘zero-touch’ SMSF administration (Part 2)