Separately Managed Accounts or Managed Discretionary Accounts?
“Whatever they tell you, we’re bigger than words
I’ve been where you’re standing, I know how it hurts”
— Head of Platforms, 2022 Managed Account Launch (or possibly “One Love” by David Guetta)
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Differentiating the undifferentiated
As you know, we’re big fans of the MDA Guru and we often turn to him to help our clients manage the commercial and operational elements involved in using an MDA.
You might also appreciate that we get many queries by advice firms that are seeking a discretionary trading solution, asking about the differences between Separately Managed Accounts (SMA) and Managed Discretionary Accounts (MDA).
It’s a key issue and the differences are seldom well understood.
We could explain, but for variety, we’ve asked our friend at MDA Guru, Peter Turbach, to lay out the differences in terms simple enough for a Compliance Manager to understand.
1. What are the main differences?
From a compliance perspective and generally speaking, Separately Managed Accounts (SMAs) are a Managed Investment Scheme (MIS) which make it an investment product requiring a Product Disclosure Statement (PDS). SMAs are usually found as a private client set up or as a menu selection on regulated platforms.
As the platform acts as the Responsible Entity (RE) they are responsible for the Investment Manager adhering to the investment mandate of their model portfolios. The adviser can simply recommend an SMA as they would for any other type of investment product as long as they have MIS authorities on their AFSL.
MDAs are explained by ASIC as generally being both a ‘facility’ for making a financial investment and an MIS. As the ‘facility’ component creates an element of advice MDA’s have relief from requiring a PDS and an RE.
So, generally speaking an SMA is 100% a product and an MDA is both a product and an advice service. I used the words, “generally speaking” because ASIC uses these words interchangeably in its regulatory guide RG-179 and they recognise the terminology used throughout the industry varies.
2. Which one is easier to implement and maintain?
This depends on how the practice is already set up.
When I help my clients, I first ask a lot of questions to be able to be confident to suggest a pathway such as, size of the practice, amount of FUM, ratio of retail to wholesale clients, how many offices and advisers they have, the controls they feel they need, what platforms and software they currently use, their investment philosophy and portfolio management structure.
I also ask what changes they feel they need to make in order to help make for a better client experience.
Usually, they have come to me for a reason and that is to add efficiencies to their business and to help make for a better client experience. The best solution may not be the easiest though.
That said, if a business is happy with their current regulated platform provider and the platform has some basic managed account administration then it is quite easy to utilise SMA’s.
The easiest option, if available, is to simply outsource the investment management to Investment Managers on that platform’s product menu. The next level up is working with the platform to create a private client structure whereby the platform acts as the RE. This will take a bit of time and expense to set up providing you are approved by the RE.
Once up and running the trading and rebalancing administration is all done by the platform. Maintaining the compliance is the same as maintaining any investment product recommendations although as a private client set up you are now officially a product provider as well.
This means you have to be aware and manage any Conflicts of Interests (COI) that will arise as well as maintaining your Best Interests Duty (BID) to your clients. How best to do this is a whole other paper.
3. Are there licensing requirements for a Managed Discretionary Account?
An MDA may be more onerous to set up at first and that is providing your licensee has the authorities to allow for it.
For my clients, with their own AFSL, we help them to apply to ASIC to vary their AFSL to add MDA authorities.
The AFSL will require a Responsible Manager (RM) with MDA experience to support the authorisations and also review the impact that the MDA may have on their Private Indemnity insurance (PI). Once the variation is complete, similar to the SMA an MDA can be managed on a regulated platform with some basic trading and rebalancing features. Unlike the SMA, an MDA can also be managed off platform as an RE is not required. Some practices I have worked with utilise in-house or outsourced reporting and rebalancing software in direct conjunction with the client’s share trading account at the brokerage. The practice is responsible for the MDA reporting and are required to have an MDA auditor’s opinion to accompany their annual Investor’s Statements. As the MDA has the advice component within its structure the Adviser/MDA Provider must make sure that the MDA’s Investment Program remains suitable to their client. This is done via an annual review that is required every 13 months. So, if you were looking at an MDA to never have to do a Record of Advice (RoA) or Statement of Advice (SoA) then think again as you still need to provide one at least annually.
To discuss licensing requirements of Managed Discretionary Accounts, reach out today.
4. Is a Separately Managed Account less trouble?
It does appear so, however as I said earlier the easiest path may not be the best path to take. Now we have to look at what the adviser/practice’s investment philosophy is and how they manage their client’s assets before deciding which route to go down.
The main benefit that a Managed Discretionary Account has over a Separately Managed Accounts is flexibility.
A practice with MDA authorisations is in control of their Approved Product List (APL) versus a platform that may have constraints as the RE or Custodian. Also, an SMA is run like a managed fund whereby clients are grouped into the same model portfolio. There can be some flexibility offered with ESG investments however nowhere near the flexibility that an MDA offers where each client can have their own bespoke portfolio or investment program. It comes down to model portfolios versus Individually Managed Accounts (IMAs).
I see the benefits of both SMAs with maximum scalability and MDAs with maximum flexibility, however you can run model portfolios with an MDA but you can’t run IMAs on an SMA structure.
Read FS’ feature on managed accounts
5. Does size matter?
For smaller to midsize practices, I like to breakdown their client base into categories.
Discretionary trading is not for everyone so we need a business-as-usual solution for this group. They could be set up with a model portfolio however changes will be made via an RoA (or SoA if required) and done manually versus as part of a greater rebalance with the discretionary portfolios. I suggest the extra work involved be priced into the service for these clients.
Next, I like to break up the discretionary clients by Funds Under Management (FUM).
I want to see if we can group the lower FUM clients into model portfolios with similar Investment Programs and the higher net wealth clients that may require more of an IMA approach. The latter client group can have portfolios that contain a model portfolio, a satellite portfolio, term deposits and other more sophisticated investments that are not suited for model portfolios.
Investments with low liquidity or long settlement periods are not really conducive when operating model portfolios. These types of clients also tend to have entities with special tax requirements that cannot be met with a model portfolio. This does not mean that an MDA is not suitable, it just means that their investment program as part of the MDA contract is very individualised.
For larger groups that require more controls in place their managed account modelling is quite different.
These groups tend to have concerns that advisers may operate outside of their authority or the licensee policy which may not fit their risk appetite. This has to be balanced with not constraining the adviser too much so they cannot manage their client’s goals and needs properly.
One of the issues I see with MDAs in larger groups is that it is hard to maintain compliance over multiple advisers in multiple locations. It is no problem to centralise the investment committee and administration for control however overseeing the annual advice suitability requirements can be challenging.
I have also seen advisers struggle during their client reviews after rolling out an MDA when there is not any strategic advice to discuss. Before, during reviews, they used to go through past investment performance and recommend changes to implement. This is now done for them and therefore they can often struggle to add value.
They can also struggle during down markets with the fact that the MDA product is their own in-house portfolio and can feel more responsible as prior to that they may have had a more investment management outsource approach which makes it is easier to explain performance issues.
SMAs for larger advice groups can offer the control they require and be more inclusive for their advisers if set up properly. For example, on a private client SMA the investment committee can create a managed account for each asset group, giving the adviser control over allocating the weights of each according to the client’s risk profile, needs and goals. This combines a centralised approach for control of the APL and allows the advisers to do what they do best. Now during reviews, the adviser can discuss goals and needs and strategically tweak the client’s portfolio asset allocations simply by moving weight between SMAs.
6. Can I choose both?
I thought you would never ask. Yes, using the above example, an adviser could “wrap-up” the SMAs in an MDA Contract. This would give the adviser discretion to make asset allocation changes without requiring an RoA or SoA every time.
I hope this helps and remember that there are countless scenarios and models that we see at MDA Guru that we enjoy discussing with our clients. From wholesale only MDAs with sophisticated investment portfolios to “limited-advice” ETF portfolios we are here to help you brainstorm and support you in your managed account journey.
7. Who is Peter Turbach?
Peter has worked for more than 25 years in the financial services sector in both Canada and Australia and has been involved with all aspects of advising and operating Managed Discretionary Accounts for the last 10 years.
Peter’s experience ranges from acting as chairman for investment committees to managing operations.
As an AFSL Responsible Manager (RM) specialising in MDA compliance and operations, Peter takes a special interest in the ‘fintech’ and ‘regtech’ sectors and actively consults with start-ups in financial services and software.
When not working Peter can often be found on a baseball diamond or an ice hockey rink.
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