The Australian Securities and Investments Commission has long harboured concerns about the provision of managed discretionary accounts (MDAs) by advisers and licensees and may resurrect the intervention in the $50 billion market it was planning before the Covid-19 pandemic hit.
A trove of unpublished and confidential documents, released to Professional Planner under freedom of information laws, detail ASIC’s concerns that MDA regulations were not fit for purpose to protect consumers in the booming managed account market.
In 2018 and 2019, ASIC conducted a review of MDAs issued on platforms but never released the results, instead announcing a suspension of the project amid the developing Covid-19 pandemic, as Professional Planner reported at the time.
However, a draft edition of a consultation paper – which was sighted by Professional Planner and scheduled for distribution in April 2020 but never published – detailed a number of concerns detected by the review.
“In our review, we observed that there are low barriers to entry in the MDA sector,” the consultation paper concluded.
“We identified that it is possible for a licensee to offer an MDA rather than a registered scheme to circumvent the more onerous financial requirements that apply to the responsible entity of a registered scheme.
“We are concerned that the current financial requirements for an MDA provider may not be adequate and are no longer fit for purpose.”
An internal report labelled “private and confidential” and dated September 2019 argued the MDA market had “increased risk of misleading and deceptive past performance figures” compared to other financial services. It also concluded MDAs could be subject to “conflicts relating to vertical integration, remuneration and conflicts rising from product manufacturer [sic] also being involved in product distribution – via in-house channels, such as related platforms, dealer groups and financial advisers”.
Area of interest for ASIC
The report does list a number of benefits of the MDA structure, including “enhanced transparency” for consumers and “more efficient business models” and “increased sales” for advisers in terms of client acquisition.
However, the report also suggests some of these advantages “may be overstated and must be balanced by the additional ‘clipping of the ticket’ that an MDA provider can charge”.
Asked why ASIC had not acted to mitigate these concerns over the past five years, a spokesperson for the regulator said this “remains an area of interest to ASIC” despite the suspension of the project in 2020.
“Those who offer managed discretionary account services need to comply with a range of legislative requirements,” the spokesperson said. “We are considering doing further work in this area in the future.”
While the documents were never released to the public, the project was seemingly in advanced stages given the consultation paper listed a publication date.
Moreover, ASIC had gone through the process of drafting a legislative instrument that would have dramatically increased the financial requirements for MDA providers. The instrument if enacted would have enforced minimum net tangible assets (NTA) of the greater of either $150,000, 0.5 per cent of the average value of client portfolio assets of the MDAs under operation up to $5 million or 10 per cent of average revenue with no maximum NTA.
The consultation paper argued this proposal would have brought MDAs into line with responsible entities and registered schemes, such as separately managed accounts (SMAs).
The paper also indicated the size and pace of growth in the MDA market was a motivating force behind ASIC’s decision to review the market. It noted that MDAs had about $30 billion in funds under management at June 2019, reflecting a threefold increase since 2016. According to Institute of Managed Account Professionals (IMAP) and Milliman data, the MDA market has grown by about two thirds since 2020, with $52 billion in MDA services as at June 2024.
But the growth in MDAs is dwarfed by the growth in the SMA/managed investment scheme alternative, which had $129 billion in FUM at June 2024, ballooning from just $25 billion in June 2019 when ASIC was conducting its review.
The revelation of ASIC’s long-held concerns about MDAs follows ASIC Commissioner Alan Kirkland’s comments to the Professional Planner Researcher Forum in December last year that reliance by advisers on information from research houses and asset consultants, including around the provision of managed accounts, was a focus area for the regulator.
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