About Managed Accounts
What is a managed account?
There is some confusion within the industry on this subject. Here is our attempt to clarify it in the Australian context. Terminology may vary in other countries. Please ensure to read our disclaimer at the bottom before you leave this article.
"Managed account" is an umbrella term that applies to a different types of portfolio management services that are:
Discretionary - the managed account provider or operator is able to make investment decisions on behalf of the investor
Non unitised - they are account based services rather than a unitised structure like a managed fund.
Of a nature where the investor has the tax advantages of beneficial ownership of each investment in the portfolio
A simplified view of the difference between how assets are owned in a unit trust and a managed account is shown below:
At the time of writing (September July 2017) managed accounts are typically offered under one of two regulatory frameworks as shown in the following diagram:
The diagram shows that managed accounts are managed investment schemes that are offered in registered and unregistered form. Registered managed investment schemes are regulated under Chapter 5C of the Corporations Act 2001, while the unregistered form, collectively known as Managed Discretionary Accounts (MDAs) are regulated under ASIC Corporations (Managed Discretionary Accounts) Instrument 2016/968 and Regulatory Guide 179.
As the diagram shows, managed investment funds (unitised managed funds) are also registered managed investment schemes, but they are not managed accounts. Registered schemes (whether unit trusts or managed accounts) are offered via a Product Disclosure Statement (PDS).
So far, there is nothing contentious about what has been written above insofar as we are aware. Where contention and confusion does arise is in respect of the various acronyms used to identify different forms of managed accounts. Put simply, there is not a clear industry wide agreement as to what these terms mean. What follows may draw disagreement from others therefore:
When people use the term Separately Managed Account or SMA they are generally referring to a platform based managed account that is in the form of a registered scheme. While they were predominantly Australian share market portfolios in the early days of managed accounts, since 2014/2015 we have seen a growing number of multi asset class SMAs offered to the market. Some people also associate the term SMA with managed accounts where portfolio trading for all investors is done through a single trading account. Notwithstanding this general application of the term SMA, there are certainly products in the market that describe themselves as SMAs, are registered schemes, but do not operate on a platform.
The term Individually Managed Account or IMA is less often heard but is used for a managed account where a greater level of portfolio customisation is available, thus allowing greater variation between client accounts. Some practitioners associate this term with arrangements where each investor has their own individual trading account and Holder Identification Number (HIN). In our view this is too narrow a definition as high levels of customisation can be provided, and lower costs achieved, without the need for individual trading accounts while preserving individual beneficial ownership.
The term Managed Discretionary Account (MDA) is a creature of ASIC Corporations Instrument 2016/968 and so is a term reserved for unregistered scheme forms of managed accounts only.
The Limited MDA (LMDA) was created by a "no action position" issued by ASIC in 2004. These MDAs were restricted to operation on a regulated platform in conjunction with a limited power of attorney. They are typically used to rebalance multi asset class portfolios using the model portfolio functionality on the chosen platform. ASIC issued a prohibition on AFSL holders commencing use of LMDAs when it released ASIC Corporations (Managed Discretionary Accounts) Instrument 2016/968 in October 2016. Users of LMDAs were given until 1 October 2017 to complete their transition to a complying form of managed account. Alternatively they had to discontinue providing managed account services beyond that date.
It is also worth noting that in just the same way that a managed fund can invest in a managed fund, a managed account can invest in a managed account (with some limitations). The following diagram illustrates the point.
Managed accounts can invest in a variety of instruments, including managed accounts, with some limitations. (For example, an MDA cannot invest in an unregistered scheme.)
What becomes clearer with experience of managed accounts is that there is great variation in the managed accounts on offer and that they can offer benefits to all stakeholders in an advisory relationship.
Investors - don't have to sign off every trade and get an easier to own portfolio management service as a result. Further, their portfolios tend to be updated in a more timely way.
AFSL holders - can offer clients centralised investment expertise and a customised service
Advisers & staff - can run more efficient practices and offer a better service to clients
Industry professionals wanting to know more about managed accounts and how to benefit from them can contact Philo via the Contact page of this website.
How big is the managed account market?
The Institute of Managed Account Professionals (IMAP) compiles a 6 monthly census on the Australian managed account industry and summarises this data in a media release thereafter. The latest information can be found on the IMAP website using this link.
Learning more about managed accounts
If you are looking for reading matter, the blog page of this website contains links to white papers prepared by Philo that provide an general overview of managed accounts, albeit some of them predate changes in regulation. If your interest is in formal training, conferences, webinars and professional interest forums, IMAP provides a wide range of opportunities of this sort. Details of upcoming events and content from past presentations can be found at the IMAP website.
Disclaimer: The information on this web page has been prepared by Philo Capital Services (ABN: 91 154 859 284) and must not be copied, either in whole or in part, or distributed to any other person without our written consent. The information on this page does not take account of your objectives, financial situation or needs or those of your client. Before acting on this information recipients should consider whether it is appropriate to their situation. We recommend obtaining financial, legal and taxation advice before making any commercial or financial investment decision. To the extent permitted by law, neither Philo Capital Services nor any of its related parties accepts any responsibility for errors or misstatements of any nature, irrespective of how these may arise, nor will it be liable for any loss or damage suffered as a result of any reliance on the information included on this page. Philo Capital Services is not a law firm and that the author of this article is not a lawyer. Nothing in this web page is legal advice and you should confer with a qualified lawyer before acting or relying on this information.