Introduction
Managed Discretionary Accounts (MDAs) are an arrangement whereby a fund manager manages a portfolio of assets for a retail client on an individual basis. There are a wide variety of arrangements that can constitute an MDA. Common types of MDAs include Separately Managed Accounts (SMAs) where stocks are held directly by investors but managed on a portfolio basis, and Individually Managed Accounts (IMAs) where portfolios are managed individually for each investor’s circumstances.
MDAs are not a new trend – they have been emerging in the Australian market over the past decade, although they have a longer track record, and enjoy greater popularity in the US market. However, there are very few well know large brand name Australian Equity funds management houses that currently offer MDA’s. They are more often offered by boutique firms.
MDAs have grown with the evolution of the platform business and share some of the benefits of master trusts and wraps (such as ease of reporting), whilst providing investors with a number of additional benefits, most particularly, the ability to hold assets directly in the investor’s name (as opposed to being held in the name of the fund manager or administration platform).
This Insight has been written to address the fact that this is a growing market segment which has the potential to divert funds away from traditional managed funds and administration platforms. To counteract that many fund managers are exploring the extension of their offerings via MDA structures. Yet these structures, like any other offering, have limitations. The key for fund managers is being aware of what is out there, and more importantly knowing your target market, and which product will suit which investor type, and how this fits with your distribution strategy.
What are the key similarities and differences between MDAs and Managed Funds?
- Investment decisions – investors in an MDA give the provider the authority to make and implement investment decisions on their behalf without the MDA provider seeking approval from the client for each decision. This is no different from a managed fund.
- Tailoring – the MDA can be personalised or tailored (to a greater or lesser degree) for individual investors. In some MDAs, the MDA provider makes investment decisions tailored specifically to the circumstances of each individual client. In other MDAs, the MDA operator may apply the same investment decisions to the accounts of multiple clients who have similar investment programs (e.g. through a ‘model portfolio’ arrangement) and there can be specific rules applied to the MDA accounts of individual clients for tax planning or other purposes. This functionality is obviously attractive to sophisticated investors and one that is not available to investors in a pooled managed fund;
- Who holds the assets – within an MDA structure the client holds a direct legal or beneficial interest in the underlying assets within the MDA. This is different from most managed funds where the underlying assets are held by a trust fund or company, and the client has a direct interest in that trust fund or company rather than the assets themselves. This can provide tax and other advantages to investors.
- Regulation – ASIC’s view is that providing an MDA to a retail or wholesale client is likely to involve providing a financial product (or products) and/or one or more financial services (including financial product advice where an MDA is provided to a retail client). Therefore MDA operators need to hold an AFSL. (Refer ASIC Paper RG179).
In Gateway’s view the key benefits of MDAs or key selling points can be summarised as:
- Tax efficiency – individual ownership of the securities means investors own their own portfolio and hence their own tax gains and losses which can be beneficial for many investors as they can deal tactically with individual taxation issues.
- Customisation – individual investors can screen stocks or not, for example be less exposed to Resource stocks if they are already overweight, or not purchase something about which they have ethical concerns.
- Transparency – the portfolio is fully available to view at all times, and portable to other platforms
- Availability and accessibility- advancements in technology have made MDAs and SMAs more affordable for the average investor – with minimum investment amounts as low as $5,000.
- Investment management – the portfolio is professionally managed
- Reporting – consolidated reporting saves time
There are some limitations however, with MDA’s which fund managers and investors need to consider:
- Reliance on MDA provider – investors are reliant on the MDA provider. It is not easy to change providers compared to switching between managed funds.
- Limited options – There are fewer SMA, IMA and MDA options available compared with the huge selection available in Managed Funds across all asset classes, countries, sectors and market caps.
- Concentration – MDAs tend to invest in large cap stocks, which skews the portfolio and limits the availability of other satellite options and in addition the style of Managed accounts is generally quite concentrated. High conviction investing has benefits but so is diversification.
- Execution – The ability for the manager to get set for all investors at the same price means there is execution risk compared to a managed fund where all investors are struck the same unit price and treated equally no matter how securities are bought and sold.
- Fees – there are a number of SMAs offered by fund managers that are available only via financial advisers. As a result, fees can vary widely across SMAs and should be checked closely; some advisers will charge up to 1% pa adviser service fees which can eliminate the cost advantages. And some fund managers may add transaction, custody and account maintenance charges that are higher for small investors than would normally be the case in a managed fund.
- Brand – not many large brand names in the Australian market currently offer these. Magellan Financial Group has just introduced one but most competitors of theirs do not offer them. If this were to change this could change considerably the landscape of these offerings.
So what does this mean for fund managers?
- Fund managers need to be aware of the benefits and limitations of offering MDAs and SMAs
- Fund managers need to revisit their distribution strategy and see if this is a segment that their investors may be interested in.
- Fund managers can consider get involved in the segment by starting their own Model, through providers such as Managed Accounts (managedaccounts.com.au) or using their own Model IM.
- Many dealer groups are also offering MDAs to their clients and are therefore effectively managing their client’s portfolios – ongoing education around why MDA structures and managed funds can be used in conjunction is required
In conclusion, Managed Accounts are another way for a fund manager to offer product into the market. It is a segment of the market that is gaining traction. Fund managers need to be aware of this and adjust their distribution strategy as required.
