ASIC was right not to act on its MDA review (and still shouldn’t)

The article on managed discretionary accounts (MDAs) published in Professional Planner this week dug up a time capsule and took us back to an unreleased report done by ASIC In 2019 based on a survey they had done. ASIC chose not to act on the report at the time.

The report noted a number of benefits that MDAs provide to practices and investors, as well as their concerns including:

• Licensee MDA programs could proliferate and possibly there should be a higher barrier to entry;
• Regulatory consistency with registered schemes – SMAs and managed funds;
• Potential for practices to inappropriately use MDAs to bolster practice revenue, given they would be both product issuer and provider of advice; and
• Insufficient separation of duties and potential for performance to be misstated.

As a result of their review, ASIC considered applying the same net tangible assets (NTA) requirements to MDA providers as apply to responsible entities of managed investment schemes. But doing nothing – as is often the case – has turned out to be the right course.

Firstly, that is because the growth in the MDA sector forecast by ASIC has not proliferated. In 2019 there were 251 MDAs and today there are 256. There have also been almost no complaints – AFCA noted just four MDA-related complaints in the year to June 2024 out of 98,622 total complaints.

Over the period, MDA on platform has become a dominant form, creating the correct alignment of roles and responsibilities, including:

• Advisers provide advice;
• Portfolio managers make portfolio decisions;
• MDA provider takes responsibility for compliance, technology and some operations; and
• Platform provides the administration, reporting and custody with all the resources that requires.

ASIC noted at the Professional Planner Researcher Forum in December that they remain concerned about advisers relying on research house ratings as a prop for recommendations. Managed accounts resolve this by transferring portfolio management to a properly qualified portfolio manager.

The concerns ASIC stated in its 2019 report, which I have seen, were:

• Growth: To paraphrase their concerns, “the market is growing fast, we should raise the barriers to entry.” It’s growing because managed accounts are a systematically better outcome for investors and advisers compared with advisers handpicking investments.
• Industry: “They expect us to do something” – I’m not hearing the shouting, are you?
• Aligning the interests of MDA providers and investors. The efficient creation of better managed portfolios has been a significant benefit for investors as well as creating efficiency for advisers
• Regulatory consistency: ASIC’s stipulation that there should be regulatory consistency stems from a fundamental misunderstanding of the operational risk of a registered managed investment scheme/managed fund and an MDA on a regulated platform.

So, what has the actual growth experience been since 2019? The table below shows that the growth in managed accounts has been very largely in the registered MIS version.

	Dec 2019	June 2024	Total Growth	%p.a. growth rate
SMA / MIS	$29b	$129b	+345pc	+39pc
MDA	$31b	$52b	+68pc	+12pc

 

And, anecdotally, much of this growth has been in SMAs linked to a single advice licensee.

Risk and regulatory consistency

There’s a fundamental issue in the 2019 papers reflected in the regulatory consistency objective referred to above. Unlike managed funds, where assets are pooled and not able to be allocated to specific investors, the assets in MDAs on regulated platforms are held by the platform in discrete accounts for each investor.

ASIC state in a draft revision of RG179 that the role of the MIS responsible entity and MDA provider are substantially similar in “managing client money”. While this is an important role, in fact the RE is responsible for a substantial operating burden not shared by MDA providers on platforms and the losses and fraud in funds almost always arise from the ability of the investment manager to move money to unauthorised uses such as lending money or paying exorbitant fees to a related party.

Almost all ASIC enforcement in the investment area has been towards managed investment schemes with NTA (think Shield, Dixon etc.)

Because of the operational responsibility of the platform, the ability of the MDA provider to act inappropriately is largely absent. In short, the operational and fraud-related risks in managed funds are dramatically higher than in an MDA on platform where the MDA provider’s rights are largely:

• Only investing in assets approved by the platform;
• Using broking facilities provide by the platform where the assets are listed (no benefit from overtrading there);
• Compliance with whatever trustee limits may apply in super; and
• Not having access to cash withdrawals.

ASIC recognise this themselves in the documents obtained by Professional Planner. The internal report refers briefly to “whether an exemption should be given to or less NTA be required of limited MDA providers”.

The limited MDA they refer to is exactly what has developed into the ‘MDA on regulated platform service’ most commonly used today.

Consumer benefits

In assessing the client benefits of MDA services, the 2019 review identified transparency, control and portability.

These are certainly investor benefits. However, they missed the key investor benefits which are generally unobtainable in other pooled financial vehicles such as managed funds. They are:

• Professional management. The transfer of responsibility to a professional investment team is likely to lead to better outcomes than reliance on an individual adviser
• Individualisation. The ability to have a portfolio run by professional managers which is adapted to the client’s specific circumstances based on a unique Investment Program
• Having regard to external assets. The capability technology is providing to manage a portfolio recognizing assets outside the MDA
• Integration with Advice. A seamless part of the adviser’s service, the MDA has a relevancy to the client’s specific circumstances which enhances their relationship with advisers.

We should go on to ask and answer the following questions:

1. Are there “low barriers to entry”?

Not evidently from the unchanged number of authorisations.

1. Would an increase in financial requirements (or related recommendations) have a material impact on the MDA market?

Yes, significantly increased capital requirements would likely cause smaller MDAs to close or transfer to specialist third party MDA providers, leading to reduced market competition and the usual increase in client cost. But client outcomes would not be better or more protected.

1. Would investors benefit from a stronger NTA requirement?

Not based on the evidence of the past 5 years (but ASIC better stay vigilant on those managed funds).

ASIC’s concerns in 2019 haven’t been borne out in the intervening 5 years. MDAs haven’t been a vehicle for regulatory arbitrage, there don’t appear to have been breaches of the fiduciary duty of providers to investors, or examples of overtrading for brokerage revenue, or egregious examples of “clipping the ticket”.

The legislative instrument is up for review in 2026 and at that time, ASIC should consult broadly on changes leading up to the review because there are several changes which should be made to the Instrument to improve outcomes for investors.

Toby Potter is chair of the Institute of Managed Account Professionals and executive director of MDA provider Philo Capital Partners.