Funds managers willing platforms to die should be careful what they wish for – Praemium boss Arthur Naoumidis thinks his new breed of self-managed account (SMA), a SMART Fund, will translate from its UK origins and be embraced by Australian financial planners, halving the fees that managers receive from old-fashioned physical mandates in the process.
Praemium’s foray into the UK two years ago quickly became a sobering experience, remembers Naoumidis, when he realised that the tax advantage over unit trusts enjoyed by Australian SMA investors, who are the beneficial owners of their shares, did not apply in the antipodes. “We had to go there to find that out…we saw we needed to become a licensed funds manager, with a trustee and a custodian, and get support from the Financial Services Authority for some rule changes to essentially allow a unitised SMA,” Naoumidis says.
Praemium spent “a small fortune” investing in local credibility, including a UK board chaired by Lord Brabourne, HSBC as trustee/custodian and the use of law firm Eversheds (at what Naoumidis says is around 2000 pounds an hour) to create a new structure and help get it approved by the regulator. The SMART Funds will each consist of one ‘unit’ encapsulating an SMA, which can be branded by the financial planning firm that offers it – the 120-adviser Foster Denovo is the largest dealer group to sign up so far.
The underlying managers will be selected by Old Broad Street Research, and under what Naoumidis calls a “hybrid” structure, the SMART Funds can either implement a ‘model portfolio’ provided by the manager, which is what is supposed to happen under the classic SMA model, or invest directly in its funds. Naoumidis admits that some managers, in the UKAustralia, are resistant to supplying their intellectual property (in the form of a reference portfolio) for implementation by an SMA, because the typical retail MER of 90 bps for an equity fund became about 50 bps under the arrangement. and
However he believes managers’ hands will be forced as more advisers adopt SMAs. “It is appropriate that more of the margin resides with the advisor, because they are the ones who turn on the tap,” Naoumidis says. Naoumidis says the “funny unit” structure of the SMART Fund will appeal to advisors because changes to underlying managers or tweaking of asset allocations will no longer require writing to all clients and providing new statements of advice – only complete changes of strategy will necessitate an SMA, he claims.