Glossary

Explanation of managed account terms

Managed Accounts

Please find below a description of various managed accounts and how they differ.


Separately Managed Account (SMA) – The word ‘separately’ in SMA is used to describe how the investment assets are held and specifically to differentiate an SMA from a ‘unitised’ Managed Investment Scheme (MIS). The main difference of an SMA over traditional unitised managed funds is that the investor is the beneficial owner of the assets in the SMA. 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. Confusion often arises due to the terminology of Managed Discretionary Accounts (MDAs) and SMAs being used interchangeably. As managed accounts progressed in the industry over the last 20 years SMA’s became generally accepted as being a financial product which requires a Responsible Entity (RE) and a Product Disclosure Statement (PDS).

Managed Discretionary Account (MDA) – The word ‘discretionary’ in MDA is used to describe the investment decision making process between an Investment Adviser and their clients. The Investment Manager has discretion to invest or divest assets within the account. As with the SMA, the investor is the beneficial owner of the assets and enjoys the same tax benefits and transparency. An MDA is also considered an MIS however ASIC has provided relief from being an RE or providing a PDS, subject to meeting a number of conditions. The regulations explain that an MDA is both an MIS and a facility for making financial advice. This advice facility must be outlined in an MDA contract which must include an Investment Program and adhere to the conditions outlined in ASIC's relief as outlined in ASIC Regulatory Guide 179.

An External MDA Adviser can be appointed by an MDA Provider. We usually see this occurring in two different MDA business models. Firstly, where an adviser holds MDA authorities and secondly, where the adviser does not hold MDA authorities. The first instance is quite straight forward and similar in effect to that of a Financial Adviser outsourcing the investment management to a multi-manager. The second instance is a growing demand whereby financial advisers without MDA authorities utilise an MDA Provider. In such instances the MDA Provider appoints the Financial Adviser as an External MDA Adviser and as such the MDA Provider is responsible for all RG-179 adherence including the on-going MDA suitability. This is similar to that of a Financial Adviser managing a client’s portfolio on an IDPS but with discretion. The discretion is held with the MDA Provider in this case although the Adviser acting as an Investment Manager makes active investment changes to the portfolios.

Individually Managed Account (IMA) – The word ‘individually’ in IMA is used to describe how the account is managed by the Investment Manager. Normally a managed fund holds a basket of investments with investors purchasing a number of units in the basket. The basket is a model and as assets are invested or divested the unit holders experience equal consideration. This same model method can be applied to SMAs and MDAs which gives the Investment Manager efficiencies in delivering their advice and maintaining their clients’ portfolios.

IMAs attempt to manage accounts outside of model portfolio methods and customise the Investment Program to the investor's specific tax needs and risk tolerances. This customisation is the main difference between SMAs and MDAs. As the level of compliance is maintained by the RE in SMAs it is virtually impossible to have any scale without running model portfolios. How could a managed fund possibly cater to all risk tolerances? The costs of setting up multiple mandates by RE’s would outweigh any benefits.

Alternatively, an MDA Investment Program is a contract between a client and the Advisor & MDA Provider and can easily be altered or individualised. This can create more work for the Investment Manager to maintain their client’s portfolios although we are seeing new software in the market place addressing this issue.

An example of the benefit of an IMA or MDA over an SMA can arise when transitioning clients from one investment to another. When investing clients into portfolio models, all assets are purchased at once which may not be the right time to purchase certain equities or sectors. In an IMA, clients’ monies can be directed into certain assets at different times.

We should also point out that IMAs don’t have to utilise an MDA contract. Advisors can choose to deliver their advice in more traditional ways such as providing recommendations to clients for consideration before any change is made.

Unified Managed Account (UMA) – The word ‘unified’ in UMA is used to describe an account where all the client’s assets held in various places can be managed in one place. Many investments are held differently by the client, for example managed funds may be held on platforms while shares are held personally or in HIN at share brokers. A UMA usually sits on a platform that uses data feeds and client authorities to receive all the investment data and transact.

UMAs allow for consolidation of assets to help manage the portfolio more efficiently. With a UMA, an Investment Manager or Advisor could mix various SMAs to achieve exposure to, for example, international shares and Australian shares but also include fixed income assets, managed accounts, ETF’s and a cash management account. This could all be managed under an MDA contract. The UMA could also include assets owned and managed by the client and these assets can be distinguishable from assets held under advice.