john aldersley, executive chairman direct portfolio services limited 22 november 2006
TRANSCRIPT
Disclaimer
This presentation has been prepared by Direct Portfolio Services Limited (DPSL), ABN 18 072 262 312, AFSL 245525. DPSL’s contact details can be found on www.shareinvest.com.au. Our address is Level 5, 2 Bulletin Place SYDNEY NSW 2000.
DPSL believes the information contained in this document to be accurate at the date of the presentation. But to the extent permissible by law DPSL makes no express warranties and excludes all implied warranties in relation to the information contained in this document.
This document does not purport to be comprehensive or to provide legal, financial or any other professional advice and should not be relied as such. To the extent permissible by law, DPSL excludes all liability for any loss or damage whether direct, indirect or consequential arising in any way out of the use of the information contained in this document or results obtained from the use of it.
Agenda
• The marketplace opportunity• An evolutionary view of discretionary portfolios • IMA, SMA & MDA – explained• SMA Features
USA SMA growth projection
-
500
1,000
1,500
2,000
2,500
SM
A A
sset
s U
S$
mil
-
3
6
9
12
Nu
mb
er o
f Acc
ou
nts
(m
il)SMA Assets US$ (billions)
Number of Accounts (millions)
Source: Money Management Institute, FRC, 2005
51% of Australians own shares 44% directly
Trend of Australian Share Ownership
0%
10%
20%
30%
40%
50%
60%
1997 1998 1999 2000 2001 2002 2003 2004
Indirect Both Direct/Indirect Direct Only
Share Ownership rising in all age groups
Direct Share Ownership - Age% owning shares directly
16
30
4247 48
21
35
4652
56
0
10
20
30
40
50
60
18 - 24 years 25 - 35 years 36 - 44 years 45 - 54 years 55 years +
2003 2004
Direct shares are 17% plus of assets
Portfolio Components 2004
Other7%
Managed Funds5%
Bank Deposits9%
Overseas Shares1%
Superannuation36% Derivatives
0%
Residential Investment Property
18%
Fixed Interest Products
7%
Australian Shares17%
ASX Australian Share Ownership Study
Direct equity investors not using planners
Source of Direct Share Ownership 2004
55%
38%
21%
13%
10%
10%
15%
0% 10% 20% 30% 40% 50% 60%
Broker
Prospectus / Float
Float or Privatisation
Financial Planner
Employee Share Scheme
Inheritance or Gift
Bought via Employer
The Australian Marketplace
• 40% of these investors do not use a planner
• Conclusion – passive holdings on Wraps & equity unit trusts are not the solution 40% of share-owning investors are seeking
Differing risk perspectives?
Adviser view of the world
• Inflation is not an issue
• Life expectancy for a 65 year old male is around 86
• Current product range should achieve investment goals
Client view of the world
• Inflation is an issue eg health care,
fuel, etc
• Longevity is seen as a risk –
(a 65 year old has >35% of
becoming a 93 year old)
• Standard industry “unitised”
products not trusted to deliver
sufficient after tax growth
Source: McKinsey Survey 2005 presented at Money
Management Institute conference in USA 2006
Evolution of discretionary managed accounts
For 200 years:• Traditional private bank style discretionary equity portfolios available to
very wealthy & institutional investors only – traditional IMA – 0.05% of population
• Team of adviser, fund manager, brokers, banker, accountant built & managed the investment portfolios
• Private banking arms of banks still operate this way
Unit Trusts took discretionary shares to the masses…
• Commenced pre-computerisation over 40 yrs ago• Pooling of investments in unit trust allowed for
investment & administrative efficiencies• Allowed for low investment minimums• Shift of power from life companies to
funds management companies
Disadvantages of Unit Trusts
• Own units not the underlying shares• Cannot transfer your existing shares in• New investors inherit existing undistributed gains• Deliberate realising of gains each year• Income & realised gains paid six monthly• Any realised losses are trapped in the trust
DIY issues to consider
paperwork hassles
too speculative at highs
sporadic dividends
hard to access growth return
too cautious at lows
Ideal future
• Separately accounted personal portfolios within a managed fund structure
• Full time professional discretionary management• Beneficial ownership & tax effective investment
management• Each client determines a monthly income amount in
conjunction with a professional adviser• Eliminate paperwork & CGT hassles
The “impossible” retail SMA of 1994
• Prospectus based “prescribed interest” retail offer• Single pooled bank account “virtual” client accounts• Single pooled “bare trust” Custodial holdings• Separately accounted portfolios• True investment system (cash and accrual accounting)• Centrally implemented manager models• Ability to transfer existing shares in specie – locked parcels• Derivative overlays on existing shares• Monthly Annuity-style income stream (EasyIncome) nominated by each client• Regular saving & instalment gearing into direct shares
Beneficial ownership
Scheme
Model Portfolio
Investor 1 Investor 2 Investor 3
Securities
Cash
Ownership Tracking to Individual
Scheme
Model Portfolio
Model Manager
Units Units Units
Model Manager
Investor 1 Investor 2 Investor 3
TrustTrust
Unit Trust Structure Separately Managed Account Structure
Trust structure is removed
FSR was a watershed
FSR introduced:• Single Responsible Entity (fiduciary) for financial products
• Distinction between financial products and financial services
• Management of conflicts of interest in discretionary accounts within a regulated compliance setting
• SMA formally recognised by ASIC
• Dec 2004 – ASIC Policy on Managed Discretionary Accounts (PS179 & CO 04/294) allows financial service version
What are Managed Accounts?
Defining features of Managed Accounts• Underlying investment assets are held personally by the investor
• Held either legally & beneficially (IMA) or just beneficially (single HIN SMA)
• Investments managed on a discretionary basis
Individually Managed Accounts (IMA)
Customisation• Tailored to individual wishes
Administration• Individual HINs
• Trades, corporate actions & income/distributions are processed at an individual level
• High administrative overhead hence high fees & minimum investments
• Difficult to scale due to individual nature of portfolio management
Legalities (Retail Clients)• Must be structured as either an Managed Discretionary Account (MDA)
or SMA financial product
Separately Managed Accounts (SMA)
Customisation• Range of model portfolios, each with particular investment process & strategy• Technology can allow for customisation
• Locked existing holdings, exclusion of stocks from a model, min trade sizes
Administration• Single HIN – all securities held by a custodian• Trades, corporate actions & income/distributions by pooled electronic processes• Highly efficient hence becoming cheaper than unit trusts• Highly scaleable so expect further cost reductions
Legalities (Retail Clients)• For pooling benefits must be structured as a Managed Investment
Scheme (MIS) – like a Unit Trust
SMA v MDA • SMA = Financial Product
• Registered Managed Investment Scheme
• PDS disclosure
• No requirement for transaction reports
• No ASIC requirement for personal advice
• No requirement to provide Statement of Advice to RE
• No ASIC requirement for continuing personal advice
• Professional active management
• Suits retail and wholesale clients
MDA = Financial Service
• Governed by PS 179 & CO 04/294
• Individual contracts
• Transactions reports required
• Personal Advice required & linked to
investment program
• Copy of SOA must go to MDA operator
• <13 months confirm advice & investment
program remains in best interests of client
• Mostly broker run portfolios
• Mostly for wholesale clients
Why advisers will go SMA route
• SMAs are financial products – no change to current business model
• PS146 Managed Fund training (& product training)
• Separation of advice from product
• Suit retail as well as wholesale clients
• Great fit with Self-Managed Super Funds
• Good margins available (less competition in retail)
• Efficient scaleable way of providing direct equities for clients
• Will shortly be wholesale product on wraps/desktops
• Adviser can focus on advice & growing client numbers (or construct own models)
• Clients are demanding them
SMA Features
Tax & investment efficiencies• No inheritance of other investor’s capital gains
• In-specie transfers without CGT events enable customisation & flexibility
• “Tax aware” portfolio management & tax planning possible – eg 12 month discount rule on CGT; tax harvesting
• Realised losses available to investors
• Reduced transaction costs (SMAs) – netting of trades
• Enables accumulation & capital drawdown strategies in direct shares
SMA Features
Investment options• Portfolios predominantly built from ASX300 securities
• Some providers offer:• Fixed interest & hybrids• Derivative overlays• Listed property trusts• Margin lending• Managed models of unit trusts
• Soon we will see direct International equity portfolios
SMA Features
Model portfolios• Range of investment strategies, managers
• Internal & external model managers
• As security weightings from model manager change, the SMA provider automatically rebalances each investors portfolio to reflect the changes
SMA Features
Customisation tools• Custody-only style service possible
• Filtering of stocks – exclude stocks/sectors from model portfolios
• “Locking” of particular tax parcels to avoid sales of “existing” shares
• Derivative overlays
• Individual tax parcel management – bed & breakfasting
• Minimum trade sizes
• IMA portfolios for ultra HNW
SMA Features
More transparent than unit trusts• Fees & charges are shown as individual transaction items
• Individual transaction history available
• Individual holdings within a portfolio are visible
• Web based daily valuation reporting the norm
• Allows the adviser/client to be fully informed
Fees & Charges
Administration Fee• Charged by the MA provider for operating the service
• Range from 0.385% to 1.5% pa. Usually scales down for size
• Amount depends on level of individualisation (increased overheads)
• Custodian & audit fees may also be charged
Model Manager Fee (Investment Fee)• Deducted and paid to the model manager
• Range between 0% - 0.6% pa depending on the type of model profile
MER (pre adviser)• Can range between 0.44% - 2.5% pa
SMAs are no fad
Client driven demand• DIY Clients believe SMAs are high touch sophisticated products –
likely to meet their emotional & financial needs
SMA Opportunities with SMSF
• Treated as a managed fund for compliance purposes:• therefore summary audited data only required by administrator • no need to verify holdings, transactions or corporate actions• can be annual rather than 24/7 super administration• Non-unitised structure appeals to their accountants
• Can establish dollar cost averaging strategies for small DIY funds via regular salary sacrifice• Can organise regular monthly capital drawdown for pension mode members – can combine
with specialist low volatility funds• Can accept existing holdings in specie• S.I.S. exemption for Risk Management Statement for Option overlays when through a
collective financial product• DIY Super Baby-boomers are fast approaching retirement – need strategic financial advice
for the first time (in their view)
SMAs deliver practice efficiencies
Current IDPS (Wrap) structures have efficiency limitations:• Investor discretionary – so SOA based changes, lack of pooling
• Direct share solutions – mainly administration based - active management can be complex & expensive (corporate actions, contract notes, etc)
• Primitive investment systems – lack accrual/cash accounting
Solution• SMA menu of mandates on wrap
• Indirect investment in wholesale SMA via WRAP
• SMA migrate to Unified Managed Accounts
(combine shares & unit trusts)