Bryan Ashenden, Head of Literacy and Advocacy at BT Financial Group.
Even for the most astute investors and SMSF trustees, acronyms and naming conventions in the investment industry can be confusing. Many investors are aware of the difference between direct investing (usually into equities) or investing into a managed fund, where you have an investment expert managing a portfolio of investments for you and others.
Today, the use of managed accounts as an investment option is increasing, and these are then broken down into different types (and acronyms), such as separately managed accounts (SMAs) and individually managed accounts (IMAs). So what is a managed account, and should you consider one for your SMSF investments?
In very simple terms, a managed account is like a managed fund, but without the “trust” structure that managed funds have. There is the benefit of an expert manager looking after a person’s portfolio and choosing particular investments at a point in time based on their experience and analysis of market opportunities.
While an investor will purchase units in a managed fund, in a managed account an investor will buy into the underlying investments. This means the investor (an individual or an SMSF) retains ownership (for tax purposes) of the underlying investments, their tax position (for capital gains tax (CGT) calculations) is based on their circumstances (such as how long have they been invested) for CGT discounting purposes, and dividends and associated franking credits flow through to the investor.
This can provide two significant benefits to an investor. The first is around CGT calculations. Depending on when you invest in a managed fund, and market movements, some investors have been caught out by a fund manager appropriately distributing income to unit-holders that contain a capital gain distribution for events during a particular year, but the investment into the managed fund itself may have fallen in value during the year due to market movements. It can give an anomalous result in that as an investor you are taxed on gains, whilst your investment has suffered a loss. It is an unfortunate outcome that you have no real ability to control, as it has happened purely based on circumstances rather than anyone’s fault. With a managed account, this risk is removed as you have greater transparency over outcomes.
Second, without the overlying trust structure of a managed fund, when distributions (such as dividends) are paid from an underlying investment, they will flow though to you as the investor, rather than accumulating with the fund manager until such time as they choose to distribute any earnings.
In an SMSF environment, managed accounts can be beneficial because of this ownership structure and flexibility it provides. It could, if appropriate, allow you to segregate some of the underlying investments between different members, or between investments held in accumulation or pension phase. Of course, you can keep it all much simpler (as many SMSFs do) and just have the managed account investment pooled with all your other investments and allocated on a proportional basis.
As always though, it pays to spend some time doing a bit of research before looking to utilise a managed account strategy within your SMSF. Different providers will charge different fees – some may be more, and some may be less than the equivalent type of managed fund investment. There may also be differences in the initial amounts you need to have available to invest. Whilst the level of initial investment has come down dramatically from many years ago, it is still typically higher than that required to invest in a managed fund. And of course, if you are investing via your SMSF, you need to ensure that the investment aligns with your SMSF’s documented investment strategy.
With some careful consideration and planning, along with assistance from your professional adviser, you could find that using a managed account strategy as part of your investment portfolio makes a big difference to your future outcomes.
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The information in this document has been prepared by Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian credit licence 233714. The information is general in nature and does not take into account your personal needs, objectives or circumstances and therefore, before acting on this information, you should consider whether it is appropriate for you.
BT Portfolio Services Ltd ABN 73 095 055 208 AFSL 233715 (BTPS) operates BT Panorama Investments (the investor directed portfolio service operated by BTPS). BT Funds Management Limited ABN 63 002 916 458 AFSL 233724 (BTFM) is the responsible entity and issuer of interests in BT Cash and Westpac Financial Services Ltd ABN 20 000 241 127 AFSL 233716 is the responsible entity and issuer of interests in BT Managed Portfolios. An Investor Guide is available for BT Panorama Investments and a PDS is available for BT Cash and BT Managed Portfolios (the Panorama products). These disclosure documents can be obtained from BTPS by visiting www.bt.com.au/smsf or calling 1300 881 716. A person should obtain and consider the disclosure documents before deciding whether to acquire, continue to hold or dispose of interests in the Panorama products.
In addition, BTPS is the provider of the Panorama SMSF Establishment Service and the Panorama SMSF Administration Service. The Guide and Terms and Conditions for these services are available by visiting www.bt.com.au/smsf or calling 1300 881 716
BTPS, BTFM and WFSL are subsidiaries of Westpac Banking Corporation ABN 33 007 457 141 (Westpac). Apart from any interest investors may have in Westpac term deposits or securities acquired through Panorama, an investment in or acquired through Panorama is not an investment in a bank or a bank deposit. Westpac and its related entities do not guarantee an investment in or acquired through Panorama Investments. © Westpac Banking Corporation 2016