Do I really Need Discretion?
At MDA Guru, we frequently receive questions from advisers asking whether they need discretion to run an efficient office, and if so, how much discretion they truly need over their clients’ portfolios.
Most of our adviser clients who come to us currently administer their investment portfolio changes using a Record of Advice (RoA). This has traditionally been their method of operation. The process typically involves sending an email to each client with an RoA, waiting for responses, and then executing the trades. This often results in executing trades in tranches, as advisers need to wait for slower clients to respond before proceeding.
Discretion, when applied through a Managed Discretionary Account (MDA), can streamline this process, enhancing efficiency. With discretion, clients will generally receive similar pricing and their investments will be transacted in the same market conditions.
However, this doesn’t mean that you can’t be administratively efficient with the current setup. The level of efficiency will largely depend on the frequency of your investment management. If you’re reviewing your clients’ portfolios once or twice a year, you may still be able to apply a limited level of discretion through a recent Statement of Advice (SoA). In this case, the RoA can refer to the SoA, which may stipulate that if a client's portfolio drifts from its current asset allocation, the adviser has the discretion to rebalance it.
Additionally, an RoA does not necessarily require client sign-off. It can effectively act as a file note, allowing an adviser to implement changes without needing client approval for every single action. However, this is contingent upon the nature of the changes being made.
Tweaking asset allocation (e.g., adjusting the weights of existing investments): No issue here; make the changes and send the RoA as a file note.
Introducing new investment products: If the change involves introducing a new product, additional advice documentation and client sign-off may be necessary, especially if the investment falls outside the scope of the SoA.
Evaluating the Need for Discretion: Key Questions
Before deciding whether to embrace the operational efficiency of an MDA, we take our adviser clients through a few key questions to better understand their business model:
Do you use direct shares, or only managed funds in your portfolios?
If you use both direct shares and managed funds, what percentage of each?
What platforms/brokers do you currently utilise?
1. Do you use direct shares, or only managed funds in your portfolios?
We ask this question to understand how actively you intend to manage the portfolios. A portfolio comprised mainly of direct shares is typically more active, whereas one that is primarily made up of managed funds tends to be more passive.
An MDA requires an annual suitability check via an RoA, so if you’re rebalancing your clients’ portfolios annually, there may not be a strong need for discretion. However, if you’re managing a predominantly direct share portfolio, the chances are you are making frequent changes, which could benefit from the efficiency that discretion offers.
It’s important to note that discretion is not necessarily suitable for all clients. For example, some clients prefer frequent updates and a hands-on approach from their adviser. For these clients, discretion may not be the right fit. As ASIC suggests in their guidelines for MDAs, discretion should only be applied where it aligns with the client’s best interests and they’ve been appropriately informed and consented. This is a point with which Assured Support agree, their review data has identified numerous inappropriate recommendations; where MDAs are recommended to clients with simple needs or static portfolios or premised on “increasing adviser efficiency” that delivers no demonstrable benefit to the client.
2. If you use both direct shares and managed funds, what percentage of each?
If your portfolio consists mostly of direct shares, with a portion of managed funds for asset allocation or thematic investing, discretion can be suitable for a large portion of the portfolio. You could apply discretion to manage the growth portion of the portfolio (usually made up of direct shares) via an MDA, while maintaining annual rebalancing of the defensive portion (typically managed funds or ETFs) through the RoA process. This allows for active management of the growth component without incurring unnecessary active management fees for the defensive portion, which is less likely to require frequent changes.
3. What platforms/brokers do you currently utilise?
This question helps us understand the level of activity within the portfolio. Generally speaking, advisers that utilise brokers tend to be more active than those utilising regulated platforms. These types of business models usually require connection to other services such as rebalancing tools, CRMs and reporting software.
For advisers using regulated platforms, which initially gained popularity for offering retail clients access to wholesale managed funds, the ability to administer diversified portfolios of direct shares and managed funds is critical. Many advisers now find value in the platform’s reporting features, tax reporting, and custodial services. The ability to produce and send out RoAs is also a feature in most platforms now. Understanding the current infrastructure helps us recommend the best solution to introduce efficiency for your client base.
Is Discretion Right for You?
We agree with Assured Support’s view that MDAs should not be considered simply as a means to avoid issuing RoAs. The decision to implement discretion should be based on whether your investment management processes warrant it. The key question is: Is an MDA fit for purpose, not only for you but also for your clients?
Discretion may add substantial value to certain advisers by providing administrative efficiency and faster execution of trades. However, it’s not suitable for every client or every adviser. Discretion should be applied in a manner that is consistent with the best interests of the client, in line with ASIC's RG 179 guidelines on MDAs, which outline the importance of suitability assessments, client consent, and transparency.
Practical Implementation: How to Introduce Discretion Effectively
If you decide that discretion is appropriate for your practice, here are some steps to implement it effectively:
1. Define the Scope of Discretion
Clearly articulate what decisions you can make under the MDA. For example, can you switch between approved direct equities within a model portfolio? Can you adjust asset allocation within agreed parameters? The scope should be tailored to your investment philosophy and client preferences.
2. Develop a Compliant MDA Contract
Your MDA contract must meet ASIC’s requirements, including:
A clear description of the services provided
The scope of discretion
Fees and charges
Termination rights
Annual review obligations
Ensure the contract is written in plain English and reviewed by a compliance experts like us or the team at Assured Support.
3. Conduct Suitability Assessments
We’d reiterate Assured Support’s advice that before placing a client in an MDA, you must conduct a comprehensive discovery and risk profiling exercise. In their view, documenting why the MDA is appropriate and how it aligns with your client’s goals, is a critical element of appropriate advice.
4. Establish Monitoring and Reporting Processes
Implement systems to monitor portfolio performance, adherence to investment mandates, and compliance with the MDA agreement. Provide clients with regular reports and ensure they understand how their portfolio is being managed.
5. Train Your Team
Ensure your staff understand the regulatory obligations and operational processes associated with MDAs. This includes knowing when an RoA is still required, how to handle client queries, and how to document decisions appropriately.
Alternatives to Full Discretion
If you’re not ready to adopt a full MDA structure, consider these alternatives:
Limited Discretion via SoA: Include provisions in your SoA that allow for rebalancing within defined parameters. This enables some level of discretion without a formal MDA.
Model Portfolios with RoA Execution: Use model portfolios and issue RoAs for changes, relying on platform tools to streamline the process.
Client Segmentation: Offer discretion to clients who value efficiency and are comfortable with delegation, while maintaining a traditional model for those who prefer a hands-on approach.
Final Thoughts: Is Discretion Right for You?
Discretion is not a shortcut—it’s a powerful tool that, when used appropriately, can enhance client outcomes and improve practice efficiency. But it requires careful planning, robust compliance, and a deep understanding of your clients’ needs.
As ASIC and academic research have shown, the key to good advice is not just efficiency, but suitability, transparency, and trust. Discretion should be implemented only where it genuinely adds value and is consistent with the client’s best interests.
If you’re unsure whether discretion is right for your practice, we’re here to help. At MDA Guru, we specialise in helping advisers navigate the complexities of MDAs, compliance, and portfolio management. Reach out for a confidential discussion—we’re always happy to assist.