The cross-generational appeal of managed portfolios

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1 December 2015 The cross-generational appeal of managed portfolios Age does make a difference when it comes to investing. Baby Boomers, Generation X and Generation Y have diverse investment needs, depending on what stage of life they are in. Managed portfolios are an attractive investment for all generations as Andrew Alcock, Managing Director of HUB24 explains. Oscar Wilde is quoted to have said: With age comes wisdom, but sometimes age comes alone. When it comes to investing, the needs of investors have traditionally been determined according to their age, with generations typically grouped as Baby Boomers, Generation X and Generation Y. There is such a diverse cross section covered by these generations. Some people will have just started their first job, or are having their first child while others are trading in their suit for a set of golf clubs. Managed portfolios can be a great investment selection for investors across all of these generations. The benefits include all those associated with direct asset ownership - ie greater flexibility, cost reduction, transparency and better control of tax outcomes. The large additional benefit is that a professional manager is making investment decisions on your behalf. Let s examine how each of these elements relates to different generations of investors. Author s note: We recognise that some other market participants refer to managed portfolios as managed accounts or separately managed accounts. This paper will use the term managed portfolio. Baby boomers (Boomers) (people born from 1946 to 1964) are currently aged between 69 and 51. Generation X (Gen X) (those born from 1965 to 1984) are currently aged between 31 and 50. Generation Y (Gen Y) (those born from 1985 to 1994), sometimes known as the Millennials, are people who are currently aged between 21 and 30. How managed portfolios address the needs and choices of SMSFs (and Boomers) Managed portfolios are a great fit for Self-Managed Superannuation Funds (SMSFs), and with the majority of SMSFs held by investors who would fall into the Baby Boomer category, it s worth considering how managed portfolios meet the needs of SMSFs. According to the Australian Taxation Office (ATO)i, the net number of Self-Managed Superannuation Funds (SMSFs) established (i.e. new SMSFs less wind-ups of existing SMSFs) in the June 2014 financial year was over 30,000. Nearly one third of all SMSF members were aged between 55 and 64 at the end of December 2014, and another 26% were aged over 64. 1

2 The ATO also notes that 24% of SMSF members at the end of last year were aged between 45 and 54, while another 13% were aged between 35 and 44. The ATO s data suggests younger Gen X investors may not necessarily be using SMSFs but they are looking to build portfolios of direct investments. From an investment perspective, the September 2014 Multiport SMSF Patterns Survey reported traditional managed funds represented less than 15% of total portfolio asset allocation for SMSF investors.1 We expect this figure to continue to diminish over time. SMSF trustees typically look for greater control, choice and transparency of assets. Managed portfolios combine attractive features of both direct investment (i.e. equities and other assets) and traditional managed funds (i.e. access to professional management and portfolio diversification). Reduced paperwork When compared to direct investment, managed portfolios offer a much lower administrative and compliance burden. For example, neither the owner of a managed portfolio, nor their adviser, has to worry about corporate actions. The work involved with assessing a corporate action, coming to an appropriate decision and then executing that decision is outsourced to the investment manager who is overseeing the assets in the managed portfolio. In other words, managed portfolios contribute to a reduction in paperwork for an SMSF. Greater transparency and flexibility When compared to managed funds, managed portfolios offer greater transparency. The underlying assets can be monitored on a day-to-day basis. In a managed fund, this is usually only possible on a delayed basis from month to month, as the investment manager releases reports. With a managed portfolio, the trustee of an SMSF (or their adviser) has a greater ability to see what is happening with the investments. Furthermore, managed portfolios often provide more cost-effective access to professional management than do managed funds. Managed portfolios don t just invest in traditional listed equities. They can also invest in listed hybrids, ASX-listed traditional bonds or exchange-traded bond (XTB) units or exchange-traded funds (ETFs) and also unlisted managed funds, offering greater flexibility to SMSF trustees and their advisers. Diversification Finally, managed portfolios facilitate the proper diversification of SMSF portfolios. This is important, because most SMSF trustees do not have the experience to build properly diversified portfolios by themselves. Partly for this reason, SMSFs collectively are overweight to direct property, cash and Australian equities, which has very real implications, from a risk management perspective. 1 The survey covers just over 2,500 funds, a sample of the SMSFs Multiport administers and the investments they held at 30 September The assets of the funds surveyed represent just under $2.6 billion. 2

3 Managed portfolios and Gen X and Gen Y investors Managed portfolios can be an attractive investment for younger Gen X and Gen Y investors who wish to save outside the superannuation system yet would normally lack the confidence to select particular stocks themselves. Most of the younger Gen X and, Gen Y, if they are not in full-time study, are in the workforce. This means that, more likely than not, they will be time poor and won t have the time to monitor investments regularly. Managed portfolios remove the need for day-to-day monitoring of the underlying investments. They also enable younger investors to build an investment portfolio that is professionally managed another big draw card for younger investors who may lack investment expertise. Managed portfolios also make it easy to change the asset allocation of the overall portfolio as the investor s risk appetite alters over time. Whether the investor, their adviser, or the manager of the underlying assets wishes to make dynamic, tactical or strategic shifts to the asset allocation, such shifts are more easily facilitated by managed portfolios, and often with lower transaction costs. Arguably, this flexibility is more important to Gen Y investors than to Gen X investors (or older investors) as Gen Y investors are likely to be exposed to more potential falls in markets for a greater period of time than other age cohorts. They re also more likely to require multiple changes to their investment allocations, to account for their evolving life circumstances. Tax implications of managed portfolios For every working Australian, regardless of age, tax optimisation is a key priority. The underlying assets that are held through managed portfolios are registered in the name of the owner, although they will generally be held by an external custodian. One implication of this is that dividends and franking credits always flow directly to the investor, which they may not do through a managed fund. An investor may make in specie transfers of securities into or out of an account that they hold with a platform. Some platforms will allow these securities to be included in a particular managed portfolio if the investment manager has the same security choice within their portfolio. This can be effected without incurring further transactions costs. Any excess stocks and funds not held within that particular portfolio can still be held in a client s account, just unattached to that particular managed portfolio. This allows for great tax and cost efficiencies. All the parcels of a particular security in a managed portfolio are not the same. Some may have unrealised gains; others, unrealised losses. Platform technology, such as HUB24 s, enables the adviser or investment manager to transact each parcel in a way that is optimal for the tax position of the owner. Transactions can be ordered on the basis of maximum gain, minimum gain or FIFO as required. A consideration of how managed portfolios work for the tax-aware also highlights some of the ways in which they differ from managed funds. For example, to move stocks from one managed portfolio to another, it is often only necessary to purchase the stocks that don t appear in the second managed portfolio and to sell stocks that only appear in the first. Transactions costs and taxable realised gains are potentially reduced in the managed portfolio. More crucially, an investor who uses a managed portfolio is not affected by tax events resulting from the actions of other investors as is often the case of a managed fund where all investors are treated the same (eg when large quantities of realised gains need to be distributed as income). 3

4 What s next for managed portfolios? The broad appeal of managed portfolios across the multiple generations means they are likely to grow in terms of take-up in the coming years. Here is a summary of some of the top predictions for the evolution of managed portfolios over the coming five years: Both SMSF trustees and their advisers will likely become advocates for managed portfolios, once they have a better understanding of how managed portfolios can reduce the administrative burden. Younger Gen X investors and Gen Y investors will come to see managed portfolios as the logical way to start investing. In general, they currently have little or no direct experience of managed funds or direct investment in equities. Increasingly, commercial success for investment managers who are looking to sell to younger Gen X and Gen Y investors will come from fruitful collaboration with platform operators who embrace open architecture in their selection of products. Both parties will have to ensure that the investors have access to all information they might need through mobile devices. Platform operators will increasingly differentiate themselves through technology. Key features will include, but not be limited to, the ability to efficiently handle individual parcels of securities for individual investors. Technology is changing all the time. Managed portfolios appeal to a range of generations, in addition to investment managers and advisers who appreciate the flexibility that comes with the right underlying platform technology. Already this technology has evolved. Previously, platforms were transaction and reporting engines. Now, they facilitate more automated portfolio management. Looking forward, we think that further changes will allow en masse and individual tilts and stock exclusions in managed portfolios at the level of each individual client. These changes will allow for further customisation of portfolios, more client-focussed outcomes for investors and greater efficiencies for advisers in dealing with unique client requirements. The effectiveness of a managed portfolio depends on the functionality or technology of the platform through which it is held, as much as on the skill and insight of the investment manager. i December-2014/?page=2#Member_demographic_table_age_ranges as at 15 September

5 About HUB24 HUB24 is a financial services company listed on the Australian Securities Exchange. HUB24's investment and superannuation platform offers a comprehensive range of investment options, with superior transaction and reporting solutions, for all types of investors individuals, companies, trusts, associations or self-managed super funds. HUB24 was established in 2007 by a team with a very strong track record of delivering market-leading solutions in the financial services industry. HUB24 is committed to offering a broad universe of investments via the platform. As an independent, nimble organisation, it can react quickly to market developments and respond with the right solutions to cater to the different needs of both financial advisers and investors. Andrew Alcock, Managing Director, HUB24 Limited Andrew has over 20 years experience across wealth management encompassing advice, platforms, industry superannuation, insurance and information technology. He was formerly Chief Operating Officer of Genesys Wealth Advisers where he chaired the investment committee for over $8bn of funds under advice, and Head of the Genesys Equity Program, where he was a director of over 20 financial planning practices across Australia. He was previously the General Manager for Asteron s wealth management business. DISCLAIMER The information contained in this material is general information only and does not take into account clients individual objectives, financial situation, needs or circumstances. HUB24 Custodial Services Limited (HUB24) ABN , AFSL , will only accept investors to the HUB24 Invest and HUB24 Super service through a financial adviser. HUB24 Invest may accept certain sophisticated Wholesale Clients (as defined by the Corporations Act 2001 (Cth) at its absolute discretion. No representations or warranties express or implied, are made as to the accuracy or completeness of the information, opinions and conclusions contained in this document. To the maximum extent permitted by law, neither HUB24 nor its directors, employees or agents accept any liability for any loss arising in relation to this document. This applies to the maximum extent permitted by law HUB24 Custodial Services Limited 5