Managed discretionary accounts (MDAs), separately managed accounts (SMAs) and individually managed accounts (IMAs) are all managed investment vehicles with some similarities. However, it’s important to understand the differences between them to enable you to make an investment decision that suits your specific needs, goals and risk tolerance level.
In this article, we will explain:
- the difference between managed accounts (like MDAs, SMAs and IMAs) and managed funds.
- what MDAs, SMAs and IMAs are, and how they work.
- FAQs about each option.
- the pros and cons of managed accounts.
The difference between managed accounts and managed funds
The table below summarises the key differences.
(including MDAs, SMAs and IMAs)
|· Investors/account holders have beneficial ownership of the account’s assets. This means that they enjoy the benefits of ownership even if the title to the assets in the account is in another name.||· Investors own units in the fund, rather than the assets themselves.|
|· Investors/account holders receive all the account income.||· The fund receives all income, and the fund manager decides what gets distributed to unit holders.|
|· Because the account holder owns all the assets in the account, there is usually complete transparency over all transactions.||· Because the investor owns units in the fund rather than assets, they usually don’t have complete transparency over all fund assets and transactions.|
What is a managed discretionary account (MDA)?
An MDA is a personal investment account where you sign a contractual agreement to give the MDA provider the authority to buy and sell investments (for example shares or units in a managed fund) on your behalf. MDAs work on a portfolio investment model. This means the MDA provider holds a ‘basket’ of investments and investors buy and sell units in the basket.
The MDA provider is often a financial adviser who manages the MDA as an investment portfolio for their client/s. If a financial adviser does this, they must have authorisation from the Australian Securities and Investments Commission (ASIC, Australia’s corporate regulator) to both provide MDA advice and act as an investment manager. However, some financial advisers use the services of professional MDA investment managers and only provide advice instead.
It’s important to understand that an MDA is an advice service and not a financial product. The MDA provider must develop an investment program in consultation with you and include it in a Statement of Advice that is reviewed at least every 13 months. This review should consider any changes to your financial needs, goals and risk tolerance level during that time, as well as any changes to financial market conditions.
For example, you may have income needs, growth goals, or a combination of both. You may be prepared to tolerate higher risk for potentially higher returns, and this may be suitable for your age and current financial situation (or it may not). This should be a major consideration when your investment program is developed.
The assigned authority of the MDA provider to make investment decisions on your behalf is where the word ‘discretionary’ comes from in relation to ‘managed discretionary accounts’. The MDA provider has the discretion to buy and sell any investments based on the mutually agreed investment program. Any investment decisions the MDA provider makes on your behalf must be consistent with this strategy. The MDA provider charges fees for the services they provide, and they are usually tax deductible. The MDA provider is also responsible for all MDA regulatory reporting and compliance.
Many MDAs are hosted via online investment platforms where assets can be easily (and quickly) bought and sold. The value of these online accounts is also very transparent. Any assets bought and sold in your MDA are owned by you as the account owner. This means that you will benefit from any franking credits you may receive. Franking credits give you a tax credit for any Australian company tax paid on dividends received. You can use this tax credit to reduce your tax liability to the Australian Taxation Office (ATO). You and your MDA advisor can plan to maximise the tax effectiveness of your investment based on your individual situation.
What fees are involved with MDAs?
MDA fees can include:
- financial adviser/professional investment manager fees
- brokerage/transaction fees
- online platform fees.
What is the minimum investment amount required to open an MDA?
Different MDA providers have different minimum investment requirements, but you can usually open an MDA with as little as $2,000.
What disclosure documents do you receive with an MDA?
MDA providers must provide you with the following disclosure documents in order to be legally compliant:
- the MDA contract (which includes the investment program based on your individual needs, goals, and risk tolerance level).
- a Financial Services Guide.
This outlines the service you will receive, the fees that will be charged and a mechanism for handling any complaints.
- a Statement of Advice.
This is a document that outlines the advice provided by a licensed financial advisor. It includes a rationale for the advice, and information on any payments or benefits that the advisor will receive in return for you accepting the advice.
- quarterly account reports.
- an annual investment statement.
What is a separately managed account (SMA)?
An SMA is a financial product, unlike an MDA which is a financial service. SMAs therefore have a different legal framework and come with a product disclosure statement (PDS). The PDS must be provided to you before you decide whether or not to open the account. It should contain all relevant information about the account, such as its potential benefits, risks, and fees.
SMAs provide investors with ownership in a professional portfolio of investments, such as local and international shares, exchange traded funds (ETFs) or other managed funds. They are managed investment schemes that must be registered with ASIC. However, the word ‘separately’ is key in relation to separately managed accounts. It reflects how the investment assets are held and it differentiates SMAs from other unit-based managed investment schemes such as managed funds.
Investors in an SMA can more easily see the current value of their investments than those in unit-based management investment schemes. That’s because unit values in such schemes are usually only reported quarterly, while the value of a separately managed account can be easily monitored daily, especially if the account information is held in a secure, online platform that you can log into as often as you want.
An SMA has a Responsible Entity whose duty is to ensure that the scheme’s investment manager complies with its mandate. A scheme’s mandate specifies how its funds are to be invested. The Responsible Entity must be a public company with an Australian Financial Services Licence authorising it to operate the SMA scheme.
The SMA is managed by a professional investment manager who is responsible for all trading, administration and reporting obligations for tax purposes. The fund manager usually has expertise and research capabilities that are beyond those of individual investors. SMA portfolios usually have a smaller number of security/shareholdings than managed funds.
Each investor gets the same ‘basket’ portfolio, which is based on a master portfolio compiled by the investment manager, who decides which shares are included and the weighting of those shares. The value of each investor’s shares will depend on their price on the day they invested.
SMAs are suited to investors who want access to a direct investment portfolio but who don’t have the time or expertise to select, manage and monitor their portfolio. As with MDAs, any assets bought and sold in your SMA are owned by you as the account owner. Again, this means that you will benefit from any franking credits you may receive on Australian share dividends. SMA balances are also usually just as transparent as MDA balances and you can plan to use them as tax effectively as possible based on your individual circumstances.
What fees do professional SMA investment managers charge?
Fees tend to vary between 0.5% and 2% of funds under management.
What is the minimum investment amount required to open an SMA?
Different SMA providers have different minimum investment requirements, but you can usually open an SMA with as little as $10,000.
Can you use SMA losses to offset capital gains?
Yes. SMAs also enable you to control and minimise the distribution of taxable capital gains.
Is an SMA portable?
Yes. You can usually move portfolios from fund manager to fund manager. You can also easily transfer funds into and out of an SMA.
What is an individually managed account (IMA)?
IMAs are also a financial service, like MDAs are. They are not a financial product like SMAs. However, unlike MDAs, they don’t require a contract to enable their management. The word ‘individually’ is key in relation to IMAs. They are individually managed based on an investment program that reflects the account owner’s needs, goals and risk tolerance level, like MDAs are.
However, the management is more customised in an IMA. For example, investments can more easily be staggered and directed to different assets based on market conditions. When you invest in an MDAs (or SMA) portfolio on the other hand, all assets are bought at once.
The investment program in an IMA may have growth, income, or other goals. For example, your funds can be directed to specific sectors, such as environmentally conscious investments. Management fees on IMAs are usually tax-deductible, like they are with MDAs.
You can also work with an advisor to achieve optimal tax outcomes with an IMA. For example, you can:
- time asset sales to minimise your capital gains tax (CGT) liability.
- aim to generate maximum franking credits to minimise your tax liability.
- focus on generating capital growth rather than income if you are in a high marginal tax bracket.
The primary difference between IMAs and SMAs is that IMAs are not managed investment schemes.
What is the minimum investment amount required to open an IMA?
Different IMA providers have different minimum investment requirements, but you generally need a much larger investment to start an IMA than you do to start an MDA or SMA.
Is an IMA better than an MDA or SMA?
This depends on your individual financial circumstances. However, the high level of customisation provided by IMAs can potentially make it more suitable. You should undertake a thorough cost/benefit analysis before making a decision on any type of managed account. The one that provides you with the most potential benefit in relation to the cost may be the most worthwhile. It’s best to seek independent professional advice before you make a decision.
The pros and cons of managed accounts
The table below outlines the pros and cons of managed accounts in general.
|They can allow you to have access to a professionally managed investment portfolio||You will pay fees for administration and investment management.|
|They can be used tax effectively.||Depending on the provider, you may not be able to invest in all the asset classes you want to with a managed account.|
|They are highly transparent, especially if your account is on an online platform.||You may not be able to time your investment purchases to maximise your returns|
|They can allow you to diversify your investment portfolio to minimise risk and maximise returns||Your assets aren’t pooled with those of other investors like they are with a managed fund. This can potentially reduce the level of diversification you can achieve with your investments.|
|They can free up your time if you are time-poor.||If you invest small amounts into a managed fund, the potential benefits may not outweigh the cost.|
|You can invest in them individually or via your self-managed super fund (SMSF).|
|They can be tailored to suit your individual financial needs, goals, and risk profile.|
The bottom line
Whether or not you should invest in managed accounts rather than managed funds ultimately depends on your individual situation. It’s best to seek professional advice that’s based on your specific needs and goals.