“You are what you do, not what you say you’ll do”
— Carl Gustav Jung (or s1041G Corporations Act)
MDA and mischief-making
The team at Assured Support are big fans of the MDA Guru (we love that brand) and we often turn to the Guru to help our clients manage the commercial and operational elements involved in using an MDA.
We’re also big fans of fireworks, so we sent the same questions to Peter Turbach, the MDA Guru and Sean Graham, our Managing Director and published their responses. In our defence, identifying inconsistencies and differences of opinions is a worthwhile exercise.
Personally, we think it’s a useful debate and, while we update our LinkedIn profiles, we encourage you to read their responses to the following questions:
- Are MDAs over-hyped and over-used?
- What are the key things to know BEFORE using an MDA?
- What are the key things to learn once you start?
- What are key things to practice on an ongoing basis?
- What are the main lessons to be learnt from your MDA experience?
- What do you see as the key MDA risks?
- Who is Peter Turbach?
1. Are MDAs over-hyped and over-used?
PETER
No, not at all. Any hype is a reaction from a group gaining huge efficiencies for their practice which leads to lower costs for clients and advisers being able to make active portfolio changes when the time is right. This can lead to better investment performance and lower costs for clients. There are many practices that are yet to see the light.
SEAN
A little bit. There’s no doubt that using a Managed Discretionary Account (or what I’d prefer to describe as a Discretionary Facility) can provide huge efficiencies to practices and simplify portfolio management; but not every client situation requires an MDA, and sometimes there are better options.
Personally, I think that discretionary facilities provide significant benefits to Clients, Licensees and advisers when they are used correctly, but too much of their promotion focuses on the significant benefits to the Licensee/practice rather than on the real benefits they provide to the clients. They can also create, or maximise, a range of conflicts that often work to a client’s detriment. I appreciate that some of our clients tackle this tension in a pragmatic and effective fashion by using the time they save on administration to build better engagement with their clients and provide more tailored, more considered personal advice.
I wouldn’t be able to call myself a lawyer if I didn’t offer you an entirely contradictory position at the same time; because of their experience with old-school platforms, advisers often fail to appreciate the real capabilities of MDA services and properly utilise their full capability. Thankfully, experts like Peter Turbach, Tim Yule and Toby Potter are helping Licensees and advisers uncover the hidden value of these facilities.
2. What are key things to know BEFORE using an MDA
SEAN
The first thing to know is that an “MDA” isn’t a product (like a savings account) but is, in fact, an arrangement or a facility that allows portfolio assets to be actively managed at the discretion of the MDA provider (subject to limitations and the terms of the agreement).
It’s a broad concept that encompasses separately managed accounts, individually managed accounts, managed discretionary portfolio services and investment advisory programs. ASIC treat it as a financial product, but they recognise it involves a range of functions including advice, custody and trading. Because of this, it’s important to understand the type of facility/arrangement you’ll be using, its capabilities and the role and obligations you’ll be assuming; are you going to be the MDA provider, an external MDA Adviser, an External MDA Custodian.
You also need to consider, at some point, whether you’re appropriately authorised to either provide an MDA (check your AFSL conditions) or provide an MDA on a regulated platform.
If you’re an adviser, check your Authorised Representative Agreement (and Licensee’s policies) to ensure that you can provide an MDA or even contract with a provider. Initially, there’s even more regulated documents involved with MDA than with other retail advice, so you need to know what documents you’ll need to develop and what documents (like your Financial Services Guide) need to be amended.
Given the level of attention MDAs receive, you should anticipate that your Licensee (or the MDA provider) may mandate that your MDA advice (particularly the initial recommendation) is reviewed or pre-vetted prior to presentation. Although ASIC suspended their MDA project in 2020 (due to COVID), in all likelihood they’ll continue to closely monitor this space.
Once you’ve got the fundamentals nailed, you need to have a firm idea as to whom you’ll offer the facility, at what cost and you’ll manage this advice process. MDA facilities can be cheaper than retail equivalents but you’ll also need to understand that active management (and frequent trading) can increase costs and create other complications for you and your client.
PETER
Communicating to your client is going to change. In the past you would spend a lot of time during reviews explaining investment changes that are about to happen and why. Now time can be better spent reinforcing client goals, strategic planning, etc. Ongoing economic updates and portfolio changes can be communicated broadly to clients monthly between client reviews.
3. What are the key things to learn once you start?
PETER
That MDAs are not for every client. Breaking down your client value proposition into a few different service categories is key to managing operations efficiently and hitting the right price points for your fees. Clients that require a lot of contact and individualised portfolio management should be paying more for their adviser’s time.
SEAN
Peter’s right on point.
It’s absolutely critical that you’re clear on the value proposition and that you’ve clearly identified the clients for whom this may be an appropriate solution. I’d also suggest that you ensure your clients benefit from the efficiencies the MDA provides – it’s more effective portfolio management but are they getting any advantages from the time you’re saving. If you’re contacting them less, but charging them the same, whose interests are you prioritising?
If you want a follow up issue, remember to check that the arrangement remains appropriate. Appreciate that you have a formal responsibility to do that annually, but please don’t treat that responsibility as a ‘tick box’ process.
Your client is trusting you to manage their portfolio without requiring their ongoing oversight, so don’t lose sight of the value (and fragility) of that level of trust.
4. What are key things to practice on an ongoing basis?
SEAN
At the risk of being seen to pimp FASEA, don’t forget to practice client care and assiduously look out for conflicts and consequences and implications that might impact your clients.
Keep an eye on the fundamentals – advice process, efficiencies, costs and appropriateness – and make sure that you’re regularly checking that the MDA is delivering on its promise to your clients and providing real benefits.
PETER
1. Making sure the investments and their weights align with the client’s Investment Program.
2. Making sure the client’s Investment Program aligns with their risk tolerance and goals.
5. What are the main lessons to be learnt by your MDA experience?
PETER
This brings us back to above, breaking down your client value propositions to refine your operations. When to use a model portfolio approach versus an Individually Managed Account (IMA). There is room for both in a practice and both can filter down from the advisory’s investment committee.
A well-managed practice can utilise both MDA’s with IMA’s and Model Portfolios. This provides a good opportunity to revitalise your Financial Service Guide (FSG). I see many FSGs full of just boring disclosure which does not shout out your great services. Take this opportunity to market your practice, and breakdown your services into categories that align with your costs and time. A good FSG goes a long way in helping clients to make an informed decision which is paramount to acting in the client’s Best Interest.
SEAN
Peter is a Responsible Manager for a number of MDA businesses, and has helped many more implement MDAs, so he’s got a solid understanding of the opportunities and the risks.
I’m positively disposed to MDAs, and I think that competent and capable advisers can use them to provide significant benefits to their clients, but I think they can be mis-sold, misrepresented and mis-used.
In addition to advisers recommending MDAs to clients who do not need them (and who would not, in relative terms, benefit from them) they often conceal inherent conflicts. I’m not suggesting that every recommendation is inappropriate (most aren’t) but we have seen arrangements that principally seem designed to maintain the Licensee’s profitability.
Don’t default to the MDA and take care to make sure the recommendation is, and remains, appropriate.
6. What do you see as the key MDA risks?
PETER
With larger dealer groups, making sure advisers maintain on-going suitability of the client’s Investment Program. This is the key weak spot when you compare an MDA to a Separately Managed Accounts (SMA). With an SMA which operates like a managed account an adviser only need to recommend the suitability once at the point of purchase.
However, with an MDA this needs to be done at least annually. The advantage of an MDA compared to an SMA is that an MDA is more flexible and can be tailored to individual client needs.
Once you issue an MDA you have crossed the line between advice and product. An MDA is a Managed Investment Scheme (MIS) by ASIC definition however with relief from providing a Product Disclosure Statement (PDS) or involving a Responsible Entity (RE). This means that AFSLs need to be aware of any possible Conflicts of Interest (COI) and avoiding Conflicted Remuneration.
SEAN
Although ASIC suspended their MDA project in 2020 (due to COVID), in all likelihood they’ll continue to closely monitor this space. MDA facilities can be cheaper than retail equivalents but you’ll also need to understand that active management (and frequent trading) can increase costs and create other complications for you and your client.
It’s this conflict issue (client priority) that I see as a bigger risk than inappropriate advice.
7. Who is Peter Turbach?
Peter has worked for more than 25 years in the financial services sector in both Canada and Australia and has been involved with all aspects of advising and operating MDA’s for the last 10 years.
Peter’s experience ranges from acting as chairman for investment committees to managing operations.
As an AFSL Responsible Manager (RM) specialising in MDA compliance and operations Peter takes a special interest in the ‘fintech’ and ‘regtech’ sectors and actively consults with start-ups in financial services and software.
When not working Peter can often be found on a baseball diamond or an ice hockey rink.
