Fact Check: Are MDAs More Complex?
One suggestion that has been put to us several times of late, from advisers that have never used a managed discretionary account (MDA), is that they are “complex”. This is a potentially dangerous misconception, as it could lead to advisers and their clients missing out on the material benefits of a service perfectly designed for their approach to advice. For this reason, it’s worth unpacking some of the elements that sit behind this suggestion and seeing if they bear scrutiny.
MDAs vs “Old School Approach”
Let’s start with the obvious question – “compared to what?” and kick off with “old school” financial planning – writing SOAs and ROAs to establish and adjust client portfolios. Consider a business with 4 advisers, each with 90 clients and 3 portfolio changes per client per annum. Under the old school approach that is 1080 SOAs or ROAs that need to be generated each year. In the current regulatory environment, many licensees require every SOA to be approved by them.
Under the MDA approach, changes to the investment portfolio are implemented without any SOA or ROA being required. Further, investors are not required to review and sign off recommendations, and implementation of portfolio changes is handled without advice practice staff having to lift a finger to execute trades. Also, advisers only need concern themselves with one Target Market Determination under the DDO regime, rather than one for every product in the portfolio.
Sounds like an overwhelmingly positive story for MDAs. However, it is necessary to prepare an ROA each year to confirm that the MDA service and associated investment program remain suitable for the client. So that is a net saving of 720 ROAs or SOAs, per year, plus an enormous reduction in operational workload and risk, plus a lot of investor time saved.
Verdict: MDAs are a powerful force simplifying the lives of investors, advisers and support teams. They offer scalability and simplicity, not complexity when compared to the “old school” approach.
MDAs vs SMAs
What about comparing MDAs to another managed account solution, platform based Separately Managed Accounts? Let’s break it down into the initial advice/investment and ongoing portfolio management.
Verdict: The complexity of MDA and SMA is roughly similar where you are committed to reviewing your client at least annually. If you have clients that you would not meet with annually, an SMA is simpler to administer. If you want to change your service at a future point, for example to add additional model portfolios as several Philo clients have chosen to do, it is less complex to do this when using the MDA structure.
And if you are an advice business where advisers use several platforms, the simplicity of one MDA service across all far outweighs the problem of meeting several platform’s due diligence requirements.
Other Considerations
But are there other dimensions of complexity that should be considered? We should look at the other suggested complexities:
Origin of Perceptions
One potential source of perceived complexity for MDAs is that MDA regulation allows for considerably more flexibility in how this form of managed account is structured. i.e. custody based, HIN based, or platform based as offered by Philo.
Maybe a lack of understanding of this flexibility is the source of the “Complexity Perception”. But it’s a massive positive because each advice firm can shape its MDA service to precisely match its advice offer. MDA regulation allows greater diversity in structure and approach which means that services can be created by organisations like Philo that better match the diverse needs of advisers and clients.
It must also be said that salespeople for SMAs can be a source of misinformation. When we trace where some adviser misunderstandings about MDAs arise, it has mostly come from those selling SMAs who do not have an MDA option to offer and whose working knowledge of MDAs is weak. Unfortunately, some of what advisers are told is not just poorly based opinion, but wrong at law. A recent example was an adviser who had been told that MDA regulation required an annual opt in signed by the client. Simply not true.
Conclusion
Using MDAs, whether compared to “old school” financial planning or using an SMA does involve some differences in regulation and approach, but they are relatively minor in the scheme of things and most planners adapt to them quickly. “Complex” is either a poorly chosen word, from those who do not know better, or a carefully chosen word from those with mischievous intent.
What’s more, the regulatory differences between SMAs and MDAs confer more benefits than disadvantage, when considered in the light of a financial planner dealing with clients with medium and large sized portfolios. But that is a story for another day.