Managed discretionary accounts (MDA) address two critical issues facing financial advice firms; the rising costs and inefficiencies caused by increased compliance requirements and changing client expectations for better transparency and investment performance.
MDAs – which are administrative investment facilities provided under ASIC Corporations (Managed Discretionary Account Services) Instrument 2016/968 – have existed for decades, but their use has mushroomed in recent years as technological advances have improved their functionality and accessibility, helping advice firms achieve greater efficiencies and scale and compete on the provision of high-quality tailored advice. This has become more pressing for advisors, as more stringent regulations are driving up costs, made worse by the paperwork associated with the rise in self-managed superannuation funds and direct share ownership.
MDAs ease the regulatory burden, as their discretionary nature means portfolio changes can be made without having to issue a Record of Advice or meet the client, so long as the changes are made in accordance with the investment mandate. This saves advisors valuable time that is better spent on income-generating activities, including providing strategic financial advice, meeting new clients, professional development and marketing.
MDAs also enable portfolio changes to be applied almost simultaneously across an entire client base – not only is this more equitable, but it also makes it possible for advisors to scale up their business to service more clients. This can boost profits, while the savings made in administration costs can be passed on via lower planning fees.
Importantly, MDAs differ from traditional investment structures, such as managed funds and unit trusts, in that they do not pool investors’ assets. Instead, investors maintain their personal tax position, allowing advisors to better manage each client’s tax outcomes.
The beneficial ownership of assets begets other advantages that can vastly improve the services advisors can deliver. For instance, clients enjoy greater transparency, as they can view their holdings, performance and fees online at any time. Superior reporting helps investors appreciate the role asset allocation plays in achieving their return targets, boosting engagement and helping to avoid panic selling during times of poor market conditions.
Not only that, but the advantages in efficiencies and scale that MDAs afford facilitate the provision of more client-centric services that can boost customer satisfaction and improve retention. This includes the ability to tailor each client’s portfolio to suit their personal financial needs, such as through a goals based investing strategy. In addition, portfolios can be dynamically managed to reduce volatility and deliver targeted returns across all market conditions, leading to better investment outcomes.
Still, dynamic asset allocation is difficult to implement without dedicating significant resources to keep abreast of market conditions. Which is why most advice firms that adopt this strategy choose to outsource their investment function to a professional investment manager. Aptly, platform technology enables MDA providers to offer a variety of portfolios across a diversified range of assets and investment strategies that advisors can mix and match to design a suitable strategy for each client.
Outsourcing investment management also means that the MDA provider will undertake related administration services, including record keeping, fee calculations, portfolio reporting and custodial services. It also enhances risk management, since the advisor is no longer subject to the compliance risk associated with investment selection. The risk of poor investment outcomes, which has amplified since the 2007 global financial crisis, is also mitigated, as portfolios are expertly managed.
Find out how switching to an MDA facility can give your advice firm a competitive advantage and strengthen your business; contact Dynamic Asset today.