How your clients and business can benefit from MDAs

The Australian MDA (managed discretionary account) market continues to go from strength to strength with growth of more than eight per cent from June to December 2017, according to figures from IMAP, the Institute of Managed Account Professionals.

Total funds-under-management (FUM) for Australian MDAs stood at $25.47 billion as at 31 December 2017, up from $16.72 billion a year earlier.

So what is an MDA and why are they surging in popularity among clients and planners alike?

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An MDA is an investment service through which an investment manager holds a portfolio of assets on behalf of a client and makes all the buy and sell decisions to generate a return. The decisions are made by the planner according to the initial strategy agreed upon with the client.

A key distinction between MDAs and ETFs (exchange-traded funds) or managed funds is that the assets are managed on an individual basis rather than as a pool of investor assets.

MDAs have the advantage over ETFs and managed funds of providing a more tailored investment approach for clients.

MDAs can invest in a broad range of assets including shares, options, fixed income, managed funds, cash and listed property.

MDAs are also often confused with SMAs (separately managed accounts). The main difference is that SMAs offer the same portfolio of assets to all investors (although the assets are individually owned), so are considered a product, whereas MDAs provide a more bespoke strategy to meet client goals, so are categorised as a service.

There are a number of advantages to the client of maintaining legal ownership of the investments in their portfolio. Obviously, all the income and capital gains generated by the portfolio are retained. But also from a tax perspective, the client benefits from tax entitlements such as franking credits and is not affected by the unrealised gains or losses of other investors as they would be in a managed fund.

For financial planners, MDAs can greatly reduce the cost and increase the efficiency of servicing clients’ investment needs.

There are considerable efficiencies of scale available through MDAs. Consolidated reporting and bulk ordering reduces overall costs for planners. These larger margins mean cost benefits can be passed on to clients.

With the planner having the discretion to buy and sell for clients, MDAs offer a much more efficient system than having to call the client for approval for every decision that is made. They also have the advantage for the client that the MDA manager is able to respond more quickly to market movements.

The Australian Securities and Investments Commission (ASIC) requires that the MDA contract be reviewed annually to ensure the portfolio maintains optimum suitability for the client.

Nevertheless, MDAs are relatively straightforward to administer as they don’t require a RE (responsible entity) or a PDS (product disclosure statement).

However, as the saying goes, “with great power, comes great responsibility”. MDAs will only work for you if your clients have absolute confidence in your ability, and that of your MDA provider, to make the best investment decisions on their behalf.

Remember that MDAs are not for everyone.

Planners may find that their older clients, for example, place greater value on a more personalised level of service.

More engaged clients might find that they want a higher level of control over their investment decisions than MDAs allow, although the platforms do allow clients to view their open positions at any time.

Ultimately, the MDA is only appropriate for a client if it truly serves their best interests. 

Eugene Ardino is the chief executive of Lifespan Financial Planning.

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