As managed accounts continue to grow in popularity, a large amount of the narrative in our industry has revolved around the efficiency managed accounts can deliver for advisers, both in time saved in outsourcing investment management, lowering investment costs and reducing compliance work. Whilst these are certainly all very important reasons to consider a managed account approach, it’s the tangible benefits to the end investor that are often not given the limelight they rightly deserve. In this series we focus on some of these key benefits, starting with the “after tax” benefits of a managed account model.
Managed funds vs Managed Accounts
You may hear the term “after tax” or “tax aware investing” and assume that all investments are focused on delivering investors the best possible investment outcome when it comes to managing their tax liability.
Sadly this is not always the case, and it comes down to a number of factors, most importantly the structure of the underlying investments themselves.
Managed funds have traditionally dominated the investment landscape, and provide an efficient and cost effective approach for investors to access professional investment management. They also offer a large choice around investment styles, asset classes, and access to a broad choice of investment managers both locally and internationally.
As managed funds are built around a unit trust structure, investors hold units in the managed fund itself rather than directly owning the underlying assets held in the unit trust. This structure, whilst efficient for managing investors capital, does have limitations when it comes to managing investors tax liabilities.
Investors in managed funds share in the gains/losses accumulated and distributed within the managed fund’s unit trust, which can cause inequality as the distributions will often include a CGT liability regardless of the timeframe the client has invested.
Similarly, the lack of beneficial ownership of the underlying assets in a unit trust means investors leaving the fund trigger a CGT event upon departure, as units must be sold down to cash should an investor wish to redeem.
The evolution of managed accounts almost 20 years ago was driven by the concept of “de-unitising” and providing investors with the same access to professional investment management, however with the benefits of the beneficial ownership of the underlying assets.
By “owning” the underlying assets, investors are able to benefit from having their own unique tax parcel history, and can often ‘in specie’ transfer existing direct assets both in and out of the managed account structure without triggering a CGT event.
Where direct Australian equities are utilised within the managed account, there is also a greater ability to ensure investors benefit from the 45-day holding rule for franking credit eligibility, as well as the 12-month CGT discount rule for asset disposals as each client will have their own tax parcel history.
At Elston we take “tax aware” investing seriously. Having managed investors capital via managed account structures over the last 10years, it’s part of our DNA. As active investment managers, we always look to add investment “alpha” or outperformance through our investing approach, however we also focus on delivering “tax alpha” by ensuring clients benefit where possible from the beneficial ownership structure that managed accounts provide.
SMAs or Separately Managed Accounts have grown significantly in the past 10 years, driven both by advisers and wrap platforms looking to deliver greater value and efficiency.
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Managed funds continue to be the dominant investment structure in Australia, with over $3tn 1 currently invested as at 30June 2019. They also continue to make up a large proportion of the $71.3bn 2 currently held within managed accounts in Australia despite some of the obvious advantages of direct investment that managed accounts deliver.
Despite some of the inherent limitations we discussed earlier, managed funds do make sense when direct exposure to certain asset classes such as fixed income or international equities is impractical. This may change as wrap platform technology continues to evolve, and the ability to manage direct assets efficiently and tax effectively increases.
We believe utilising direct asset assets where practical within a managed structure is a key opportunity for advisers to add “tax alpha” and articulate additional value to their clients above and beyond traditional investment models. In the next series on managed accounts, we’ll further explore some of the other client benefits of managed accounts, including transparency and control.
2: IMAP AUM Data 30 June 2019
This material has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained in this material is General Advice and does not take into account any person’s individual investment objectives, financial situation or needs. Before making an investment decision based on this advice you should consider whether it is appropriate to your particular circumstances, alternatively seek professional advice. Where the General Advice relates to the acquisition or possible acquisition of a financial product, you should obtain a Product Disclosure Statement (“PDS”) relating to the product and consider the PDS before making any decision about whether to acquire the product. You will find further details of the service we provide and any cost to you within the Financial Services Guide. Any references to past investment performance are not an indication of future investment returns. Prepared by EP Financial Service Pty Ltd ABN 52 130 772 495 AFSL 325 252 (“Elston”). Although every effort has been made to verify the accuracy of the information contained in this material, Elston, its officers, representatives, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this material or any loss or damage suffered by any person directly or indirectly through relying on this information.
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