"Nobody said it was easy. No one ever said it would be this hard": Understanding MDA, SMA and IMA

 
The take-up of SMA and IMA services has been slow, and ... there are a number of reasons for this, not the least of which is advisers’ lack of understanding of the differences between SMAs, IMAs and managed discretionary accounts (MDAs), with all three terms often being used, incor­rectly [and] interchangeably.
— David Wright, 2011

For better or worse, change is a staple of the financial services industry. Although David Wright made his critical observation back in 2011, the confusion has persisted despite, or perhaps because of, the growth of the managed accounts sector. Over the past few years we've seen a steady, and perhaps inevitable, series of changes that are gathering enough momentum to reframe, or revolutionise, the financial services industry. 

Monolithic, institutional advice businesses are fragmenting under increased regulatory focus and an emerging realisation of the value of independence, traditional advice models are incorporating or being replaced by digital advice solutions, and traditional model portfolios of managed funds and equities are being abandoned in favour of managed account solutions that offer increased flexibility, greater efficiencies, direct ownership and often lower costs. 

It is not clear whether the evolution of these account solutions has driven adviser demand or simply occurred as a result of adviser and investor demands. The truth is perhaps impossible to determine, but the popular appeal of Managed Discretionary Accounts (MDA), Separately Managed Accounts (SMA) and Individually Managed Accounts (IMA) is inarguable.

The problem for compliance experts and advisers, is, as David Wright identified in his 2011 article,  that the differences are often poorly understood and the solutions even more poorly differentiated. 

In our experience, and despite a wealth of information, many advisers still struggle to identify and articulate the similarities and differences between the options.

Legal structure, asset ownership and tax consequences can be confusing.

Thankfully, Peter Turbach from mdaguru.com.au, is an expert in these matters. He's offered us these insights:

 

Managed Discretionary Account (MDA)

The 'discretion' granted under an MDA is not absolute but specifically limited to the Manager's investment decision making process. The Investment Manager has broad discretion to trade, acquire or dispose of account assets. 

Notwithstanding the discretion, the investor is the beneficial owner of the assets and continues to enjoys the same tax benefits and transparency.

An MDA is a Managed Investment Scheme but one whose provider has been granted relief by ASIC (subject to conditions) that spares them from being, or appointing, a Responsible Entity (RE).

This regulatory relief means that the account can be treated as an advice service and not as a financial product.

There are a number of conditions attached to this flexible regulatory approach.

  1. This advice service must be documented and explained in an MDA contract.
  2. The MDA contract must include an Investment Program and
  3. The service must comply with ASIC Regulatory Guide 179.

Peter emphasises that, from a licensing perspective, in most cases there are two important elements for advisers to consider. First, they'll need authorisation from ASIC both to provide advice to clients about an MDA  and to act as an Investment Manager for the investments authorised under the MDA contract. Second, they'll need the 'dealing' authorisation so that they can act as the MDA Provider (in this capacity they'll will be responsible for all the operations and regulatory reporting associated with the MDA). In Peter's opinion, where the arrangement involves external Investment Manager, it is possible to provide an MDA service by relying on relief and the authority to advice in Managed Investment Schemes. It's a nuanced argument but one that he's happy to explain and help advisers implement

 

Separately Managed Accounts (SMA)

Peter explained that the word ‘separately’ in a Separately Managed Account simply describes how the assets are held. In his view, advisers often confuse SMA (financial product) and MDA (financial service) because they have similar characteristics despite operating within a different legal framework.

Essentially, an SMA is a managed fund with a  Responsible Entity (RE) who ensures that the Investment Manager complies with their mandate and, if applicable, issues the Product Disclosure Statement (PDS).

The main difference between an SMA and a unitised managed fund is that, in an SMA, the investor is the beneficial owner of the assets. Direct beneficial ownership of assets may lead to tax benefits for the investor. 


SMAs are also considered to be more transparent as investors can see their holdings live versus a traditional fund whereby an investor may only see the top weighted holdings of their units, usually reported quarterly.
— Peter Turbach, mdaguru

The particular structure of the SMA is the reason why, in our view, an IMA or MDA is often a better option.  In an IMA or MDA, unlike an SMA, an operator can time or stagger investment decisions in response to market conditions. 

 

Individually Managed Account (IMA)

The word ‘individually’ in an Individually Managed Account describes how the account is, and will be, managed by the Investment Manager. IMAs are not Managed Investment Schemes and don't require an MDA contract, so they are more easily accommodated in a traditional advice process.

Traditional managed funds collectivise assets according to their models and mandates and unitise the assets to deliver efficiencies and internally consistent experiences. An IMA, in contrast, eschews portfolio models in favour of an Investment Program built to reflect the investor's specific needs, circumstances and tolerance of investment risk.

The degree of customisation is, in Peter's opinion, the main difference between SMAs and MDAs (and their compelling  advantage over retail or industry funds)


It is virtually impossible to have any scale in an SMA without running model portfolios. No retail managed fund could possibly cater to all risk tolerances without assuming operational costs that would destroy any profits they might achieve.
— Peter Turbach, mdaguru

 

Key Features 

For a potted summary of the key features of these managed account structures, Cameron Garrett's overview (provided below) may provide enough information. For a more technical analysis, we'd refer you to our friends at mdaguru

 Source: Cameron Garrett – Head of Wealth Product and Technology, Division Director at Macquarie Group

Source: Cameron Garrett – Head of Wealth Product and Technology, Division Director at Macquarie Group