Opportunity for advisers in limited MDA platforms

With the Australian Securities and Investments Commission (ASIC)’s 2013 proposal to change requirements around limited managed discretionary account (MDA) platforms appearing to be on hold for some considerable time, the time could be right for advisers to start including them in their suite of service offerings, according to The Fold Legal (the Fold).

The Fold’s managing director, Claire Wivell Plater, says MDAs enable advisers to quickly rebalance their clients’ portfolios, allowing them to, for example, quickly take advantage of a momentary over or under valuation of a stock or exercise a corporate action such as a rights issue or share buyback.

“The attraction of MDAs for advisers is the operational efficiencies they offer,” Ms Wivell Plater says. “There is no need to obtain a client’s consent in advance to simply rebalance a portfolio. Provided advisers can operate them efficiently, MDA services can be an excellent way for advisers to add value.”

Unlike full service MDAs, limited MDA services are provided through an investor directed portfolio service (a platform), which takes care of administration, custody and reporting.

“Advisers can only invest client funds via the platform and can only contribute to or withdraw funds from the platform with the client’s prior authority,” she says. “Currently, advisers who provide a limited MDA service must also obtain a Power of Attorney from the client authorising them to manage the investments within the agreed parameters. However, they don’t need any specific MDA authorisation on their AFS licence.”

In 2013, ASIC proposed changing the law relating to limited MDAs to require operators to:
– Hold a specific limited MDA authorisation on their AFS licence, and
– Hold minimum net tangible assets (NTA) of the greater of $150,000, 10% of MDA operator revenue or 0.5% of the value of MDA assets managed – with a ceiling of $5m NTA

Ms Wivell Plater says that businesses intending to offer a limited MDA service which provides only the advice and investment management components of an MDA service, could be fairly comfortable that they can operate under the existing regime until 2016 when the current Class Order (and No Action Letter) may lapse.

“Even if formal changes do occur before 2016, there would need to be a reasonable transition period for limited MDA operators to obtain ASIC authorisation,” she speculated. “This could be up to two years. So it’s a reasonable bet that advisers who start now would have the required 3 years’ experience by the time they need to apply to be Responsible Managers a ‘limited’ MDA licence – if and when the mooted changes proceed.”

Ms Wivell Plater has warned, however, that there are no guarantees. “ASIC has made it clear that it’s worried about MDAs, because of the potential for fraud and overtrading. So advisers would be well advised to have a fall back position in case the limited MDA regime came to an abrupt halt.”

The Fold has released a comprehensive ‘Limited MDA Kit’, which contains all the documentation and procedures required for advisers who offer a limited MDA service. Available for purchase online, it contains the following, each of which may be purchased separately:
–  FSG material
– SoA material including MDA Contract and Investment Program
– Power of Attorney
– Annual Review SoA/RoA material
– ‘Limited’ MDA Policies and Procedures.