A managed discretionary account (MDA) is a facility – other than a registered managed investment scheme (registered scheme) or an interest in a registered scheme – in which an MDA client entrusts management of their portfolio of assets to an MDA provider.
Pursuant to ASIC Instrument (Managed Discretionary Account Services) Instrument 2016/968 an:
MDA provider means a person who holds an Australian financial services licence that authorises:
(a) dealing by way of issue in either or both of:
(i) interests in managed investment schemes that are limited to a right to receive MDA services; and
(ii) miscellaneous financial investment products that are limited to a right to receive MDA services; and
(b) dealing in all the financial products that may be acquired with client portfolio assets under the MDA contract; and
(c) except where an external MDA adviser has contracted directly with each retail client to whom the MDA provider provides MDA services to provide financial product advice relating to the ASIC Corporations (Managed Discretionary Account Services) Instrument 2016/968 Part 1—Preliminary investment program—providing personal advice to people as retail clients in relation to the MDA; and
(d) except where an external MDA custodian has contracted directly with each retail client to whom the MDA provider provides MDA services to hold each client portfolio asset that is a financial product or a beneficial interest in a financial product—providing custodial or depository services, in relation to those client portfolio assets.
Managed Discretionary Accounts are essentially a portfolio management service in which investors provide funds to an investment manager to manage your portfolio in line with an agreed Investment Program and the client retains beneficial ownership of the assets.
By setting up a Managed Discretionary Account, you are able to remove the constant back and forward between you and the manager when it comes to the buying, selling or applying for investment in a wide range of investment products. So essentially, you are giving your money – or some of it – to someone else to look after.
The key benefits of a Managed Discretionary Account are that you are gaining access to a professional investment manager with extensive access to research and expert stock selection, which ultimately includes their active management of your account on a daily basis, responding proactively to market changes.
In addition, your Managed Discretionary Account can have a high degree of flexibility and tailoring to your specific investment strategy and or needs, including your risk tolerance rather than your money being merely thrown into a fund along with all the other investors pooled money.
In this way, Managed Discretionary Accounts are different from managed funds and provide greater transparency – through portals and individual correspondence - as to what the investors’ money is doing and when.
Who regulates Managed Discretionary Accounts?
With the spotlight placed firmly upon the financial services industry in the wake of the 2018 Royal Commission into the misconduct in banking, superannuation and the financial services industry, there is little doubt that investors are more aware of the need for accountability and transparency in their dealings with advisors in the sector.
Managed by ASIC under the Regulatory Guide 179: Managed Discretionary Accounts, there are strict rules and regulations that govern the setting up and running of these accounts for retail clients.
Therefore, providers of MDA Services must hold an Australian Financial Services (AFS) Licence with specific authorisations which allow them to issue MDA Services to clients. As a result of holding an AFS Licence they are governed by ASIC under the Corporations Act 2001.
Under an MDA Service you will receive personal advice from your financial adviser, who must hold the professional qualifications (or will be working towards holding the professional qualifications during the transitional period) as prescribed by The Financial Adviser Standards and Ethics Authority (FASEA) and meet, at all times whilst dealing with you, the principles and core values set under the Financial Planners and Adviser Code of Ethics.
Why use a Managed Discretionary Account?
The underlying benefit of Managed Discretionary Accounts is flexibility and transparency.
According to financial adviser and co-founder of Plenary Wealth Julian Nowland, “Using managed accounts has allowed us to switch the client communication on investments from being an admin and paperwork focus into a marketing and education strategy”.
Nowland continues, “instead of requesting information from clients to fill out forms or getting permission to buy this and sell that, we can focus on education, keeping clients updated on changes being made to the MDA, why it has happened and how that relates back to client’s lifestyle outcomes.”
By reducing the amount of paperwork and the authority to execute buys, sells and applications for financial instruments within the agreed guidelines, managers are provided with far more flexibility to act and capitalise upon opportunities as they arise – often in a time-critical manner.
If the account was ‘non-discretionary’, the advisor would require a range of authority from the client and paperwork to be completed by the client to transact the trade. This also assumes that the client was available at any given moment to speak with the advisor.
As such, Managed Discretionary Accounts are ideal for people who are busy or people that don’t have the time or skills to be involved in the ‘active portfolio management’, but rather prefer a balanced approach to their investment strategy having a long-term view.
In addition, should the client be travelling or on a different time zone, Managed Discretionary Accounts can provide solutions, which allows them to be essentially passive to their portfolio management, while their advisor makes their money work for them.
With usually a minimum $250,000 minimum investment requirement, they are suited to the sophisticated investor and those who meet the investment requirement.
What to look out for in a Managed Discretionary Account Manager?
When looking to invest money into a Managed Discretionary Account, there is a range of elements that you should always look for when assessing the viability of a manager for your account. Firstly, you want a manager who has knowledge around not just securities, but also a wide range of derivatives, managed investments, foreign exchange, margin lending and alternative investment strategies.
Having a Managed Discretionary Account manager who is well versed in a wide variety of investment options will provide you with the most holistic portfolio options and opportunities, which is always a benefit for any portfolio. In addition to this, ensure that your chosen financial advisor is on the Moneysmart Financial Advisors register and that they hold (or are working towards holding) the professional qualifications prescribed by FASEA.
Why are Managed Discretionary Accounts growing in popularity?
Like many industries, the financial services industry is being held to account for often out-dated practices due to technology driving innovation in the sector. As such, this technology is seen not only to increase efficiencies but also in transparency and accountability.
Growth in Managed Discretionary Accounts has been driven by several factors, including:
Through Managed Discretionary Accounts, investors are able to be more connected to their investments thanks to technology and have more visibility and accountability, while the account managers have the authority and flexibility to act as the opportunities arise to maximise the growth potential of the portfolio.
Unlike many funds, in a Managed Discretionary Account, the investments and cash are all held in your name, on your HIN rather than on the managers or the fund itself. As the owner of the Managed Discretionary Account, you can always log in to review the exact composition and value of the portfolio at any time through online platforms, providing the ultimate in transparency.
In addition, Managed Discretionary Accounts are far simpler to manage come tax time, as all the investments are held by you, without other people moving in and out of the fund, potentially impacting your capital gains tax each financial year.
However, as with any financial service or investment, there are risks that need to be assessed and managed in line with your personal investment strategy, risk tolerance and desired outcomes.
The size, make-up and strategy you employ in your Managed Discretionary Accounts, like all investments, will be subject to market volatility, company, sector and industry risks. When dealing with overseas markets or currency, it should always be assumed that foreign exchange risks would apply and have a bearing on the gains/losses.
When using leveraged products, such as CFDs (contracts for difference) or leveraged loans or positions to amplify the position that the Managed Discretionary Account manager may employ or wish to hold, it should be noted that your position may require additional capital that exceeds the amount available in the fund, should the investment go against your position. Participation in leveraged products should be the part of your investment strategy which is taken with caution.
With all of the potential benefits that Managed Discretionary Accounts offer to investors, there are risks, but like any good hedge, they can be managed with due diligence and ensuring that your account manager is suitability qualified and experienced to meet the needs of your investment goals.