Clarifying The External MDA Adviser
Since we wrote the article titled “The Shades of the Grey in the Managed Accounts World”, we at MDA Guru have received many questions to clarify specifically the grey area with regards to appointed External MDA Advisers. Due to this and to help clarify we will use two different MDA business models;
a) Where an adviser holds an AFSL with MDA authorities
b) Where an adviser does not hold an AFSL with MDA authorities
Where an adviser holds an AFSL with MDA authorities the legislative instrument is quite clear with regards to the AFSL appointing an External MDA Adviser. A typical situation would be where a practice which holds MDA authorities to both advise and deal, outsources the investment decisions to an investment manager. The practice owns the relationship with the clients, recommends the advice to enter into an MDA agreement and is responsible for the assessment of the on-going suitability. The investment manager is only making investment decisions, based on the agreement with the MDA Provider, and is not privy to the know-your-client (KYC) fact find information that supports the MDA advice. The investment manager need only hold AFSL authorities in the investment products comprising the MDA Investment Program. This is a similar business model to a practice outsourcing investment management to a Multi-Manager on an IDPS or Master Trust type platform.
Where an adviser does not hold an AFSL with MDA authorities the legislative instrument is not quite as clear. A typical situation would be an advisory practice wanting to utilise an MDA Provider to gain efficiencies on delivering advice to their clients. In this case the Financial Adviser is usually the Investment Manager and simply wants to outsource the operations. The next step is the key. What must be done to facilitate this is the MDA Provider who holds AFSL authority to deal in MDA appoints the Financial Adviser as an External MDA Adviser. The MDA Provider acts like a platform and in some cases is an IDPS or Master Trust which is responsible for the MDA operations. As the MDA Provider, the platform is therefore required to adhere to all RG-179 requirements including the on-going suitability of the client’s investment program. This is similar in effect to that of a Financial Adviser managing a client’s portfolio on an IDPS platform but with discretion although the discretion is given to the MDA Provider/Platform and not the adviser making the investment decisions. To facilitate the arrangement an MDA tripartite agreement between the Client, Adviser, and MDA Provider is required.
What about the provision of advice into MDA?
Based on RG 179, it appears the answer is that if the Financial Adviser recommending the MDA has authority to advise on Managed Investment Scheme (MIS) then all is good as an MDA is indeed an MIS (with specific legislative relief). The Adviser therefore does not require advice authority to advise into an MDA. The Adviser will also require authorisations in any asset types that are included in the MDA investment program.
How does an MDA Provider that acts like or is a platform and appoints an External MDA Adviser monitor the on-going suitabity requirements?
Especially considering the MDA Provider does not undertake the full KYC. It is a requirement that the MDA Provider must at least make sure the financial adviser has provided advice on the MDA and that the MDA is not inappropriate. There are processes and procedures that can be put into place which the MDA Provider/Platform must do to minimise their risk.
How can an MDA Platform which only holds authority to deal in MDA but not advise be accountable for the advice component?
Good question, and certainly one that will need to be considered in the future. It is especially interesting as ASIC is currently undertaking a consultation of MDA Providers to gain a greater understanding how MDAs operate in practical situations.
It appears the regulations were set up and designed for the typical business case where the Adviser is the MDA Provider as per case “a)” above. Where the MDA provider is not the Adviser it is like fitting a circle into a square. Hopefully ASIC will look outside the square and come up with some minor tweaks to clarify and help the Managed Accounts industry with regards to compliance.
If you have any questions in relation to MDAs, whether as MDA Provider or MDA Adviser, please feel free to contact us at MDA Guru. We are here to help.