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.

Naoumidis admits that the SMART
Funds will benefit from the lobbying already done by Perpetual Investments on behalf
of its WealthFocus Investment Advantage platform, which gained an ATO tax
ruling which will allow investors to switch between 76 underlying funds without
crystallising any capital gains tax. Naoumidis will seek a similar ruling.