SMA, MDA, IMA, UMA....What are we talking about?
What is the difference between all these confusing acronyms we hear when investigating managed account solutions?
The difference, once you strip out the common letters "M" for “managed” and "A" for “account” are the following;
S – Separately
D – Discretionary
I – Individually
U – Unified
These can differ greatly in legal structure, flexibility, compliance and costs. Understanding these differences before transitioning your valued client base will go a long way in avoiding risks to your advisory.
If you are investigating which type of managed account solution is most suitable for your business then let us help you, so that you can make an informed decision.
Separately Managed Account (SMA) – The word ‘separately’ in SMA is used to describe how the investment assets are held and specifically to differentiate an SMA from a ‘unitised’ Managed Investment scheme (MIS). Confusion often arises as Managed Discretionary Accounts (MDAs) also differentiate from an MIS in the same way although within a different legal framework.
An SMA is an MIS which is ASIC’s name for a managed fund. The main difference of an SMA over traditional unitised managed funds is that the investor is the beneficial owner of the assets in the SMA. Direct beneficial ownership of assets may lead to tax benefits for the investor. SMAs are also considered to be more transparent as investors can see their holdings live versus a traditional fund whereby an investor may only see the top weighted holdings of their units, usually reported quarterly.
As an SMA is usually considered by the industry as an MIS (managed fund) there must be a Responsible Entity (RE) who oversees the Investment Manager in order to comply with the fund’s mandate. An SMA is therefore considered a financial product and will likely require a Product Disclosure Statement (PDS).
Managed Discretionary Account (MDA) – The word ‘discretionary’ in MDA is used to describe the investment decision making process between an Investment Manager and their clients. The Investment Manager has discretion to invest or divest assets within the account. As with the SMA, the investor is the beneficial owner of the assets and enjoys the same tax benefits and transparency.
An MDA is also considered an MIS however ASIC has provided relief from being an RE, subject to meeting a number of conditions. This allows the account to act as an advice facility and as a product. This advice service must be outlined in an MDA contract which must include an Investment Program and adhere to the conditions outlined in ASIC's relief as outlined in ASIC Regulatory Guide 179.
Individually Managed Account (IMA) – The word ‘individually’ in IMA is used to describe how the account is managed by the Investment Manager. Normally a managed fund holds a basket of investments with investors purchasing a number of units in the basket. The basket is a model and as assets are invested or divested the unit holders experience equal consideration. This same model method can be applied to SMAs and MDAs which gives the Investment Manager efficiencies in delivering their advice and maintaining their clients’ portfolios.
IMAs attempt to manage accounts outside of model portfolio methods and customise the Investment Program to the investor's specific tax needs and risk tolerances.
This customisation is the main difference between SMAs and MDAs. As the level of compliance is maintained by the RE in SMAs it is virtually impossible to have any scale without running model portfolios. How could a managed fund possibly cater to all risk tolerances? The costs of setting up multiple mandates by RE’s would outweigh any benefits.
Alternatively, an MDA Investment Program is a contract between a client and the Advisor & MDA Provider and can easily be altered or individualised. This can create more work for the Investment Manager to maintain their client’s portfolios although we are seeing new software in the market place addressing this issue.
An example of the benefit of an IMA or MDA over an SMA can arise when transitioning clients from one investment to another. When investing clients into portfolio models, all assets are purchased at once which may not be the right time to purchase certain equities or sectors. In an IMA, clients’ monies can be directed into certain assets at different times.
We should also point out that IMAs don’t have to be run within an MDA contract. Advisors can choose to deliver their advice in more traditional ways such as providing recommendations to clients for consideration before any change is made.
Unified Managed Account (UMA) – The word ‘unified’ in UMA is used to describe an account where all the client’s assets held in various places can be managed in one place. Many investments are held differently by the client, for example managed funds may be held on platforms while shares are held personally or in HIN at share brokers. A UMA usually sits on a platform that uses data feeds and client authorities to receive all the investment data and transact.
UMAs allow for consolidation of assets to help manage the portfolio more efficiently. With a UMA, an Investment Manager or Advisor could mix various SMAs to achieve exposure to, for example, international shares and Australian shares but also include fixed income assets, managed accounts, ETF’s and a cash management account. This could all be managed under an MDA contract. The UMA could also include assets owned and managed by the client and these assets can be distinguishable from assets held under advice.
We hope this article helps to give more meaning to these acronyms and helps to simplify and clarify these types of Managed Accounts. If you would like to discuss further please feel free to send us an email or call us directly.