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SMA & MDA Explained
Two ways to access professionally managed portfolios
Separately Managed Accounts (SMAs) and Managed Discretionary Accounts (MDAs) are both means of administering an investment portfolio by a professional investment manager on behalf of a client. In both cases, the client gives the investment manager the authority to manage their capital in line with specified parameters that are agreed upon by both parties.
Professionally managed investment account structures
The legal difference
While an MDA and an SMA are functionally very similar, the main difference in the structure is legal. Managed Discretionary Accounts are considered a service, while Separately Managed Accounts are considered a product. This means that investors in an SMA will be provided a product disclosure statement (PDS) outlining the product, whereas those in an MDA will sign an MDA agreement with the investment manager. This MDA agreement explicitly governs the types of investments that the investment manager can include in the portfolio for the client and will be based on the risk profile, growth aspirations, and other preferences of the client.
SMAs and MDAs also have different oversight obligations. For example, investors will enter into an agreement directly with the MDA provider (us, as the investment manager), and the responsibility is on the MDA provider to ensure that portfolios remain within the mandate and are appropriate. This MDA agreement is an important contract and is signed in place of a PDS. The MDA provider must also be specifically authorised by the Australian Securities and Investments Commission (ASIC) to provide MDA services.
In the case of Separately Managed Accounts, the onus rests on the responsible entity (RE) of the SMA product, which is separate from the investment manager. The RE ensures the investment manager stays within the mandate with respect to asset class exposures and risk management. The RE is technically the one that provides the product to the investor, and the investment manager provides the service to the RE. This adds an additional layer of compliance and oversight, but may also come with additional costs.
Advantages of an MDA or SMA managed account
We continually monitor the many changes that occur in the investment markets. When using an MDA or SMA, we can make changes to the investment managers and the asset allocation immediately, without the need to contact the client to approve the changes.
Note: We are not authorised to move you from one portfolio to another. We can, however, make changes within the chosen model portfolio so long as we stay within the agreed-upon mandate.
The best of both worlds. Managed Discretionary Accounts combine the best elements of a managed fund together with the advantages of direct share ownership.
Cost effective. Investment technology has vastly improved in the last decade, allowing for more efficient and cost-effective management of portfolios.
Simplified reporting. A portfolio of individual investments would typically result in complex management of buy and sell recommendations as well as dividend confirmations. Our administration software provides quarterly and annual reporting to keep investors informed and portfolio administration simple. Clients can also view their portfolios online 24 hours a day.
Netting of transactions. When an investor buys or sells shares on the stock exchange, they will normally pay brokerage or transaction fees. Whilst the same is true with transactions within an MDA, when multiple investors inside the scheme add or redeem funds at the same time it is possible for these opposite transactions to net each other out, thus avoiding the stock exchange costs. This reduces the brokerage that MDA investors will pay over time.
In addition:
•Investors have 100% visibility over the investments in the portfolio. Investors are able to log onto the platform portal and view each of the investments in their portfolio and their values in real time.
•Investors can customise the portfolio with the ability to either exclude or include investments in the portfolio.
•The MDA provider takes care of all the reporting, making it easy for your accountant to calculate capital gains, income and franking credits when preparing your tax return and accounts.
•Low minimum investment amounts mean that individuals can invest in a portfolio with as little as $25,000.
Enquire today to see how we can help.