MDA Operators: 6 Reasons to Convert MDAs into a Managed Investment Scheme

Rupert Smoker, CEO Evolution Trustees

Managed discretionary accounts (MDAs) are arrangements that enable financial advisors to flexibly invest on behalf of their clients. Under an MDA, investment decisions are made by financial advisers who have the trading discretion over the client’s account. The ownership of the assets remains in the client’s name. By contrast, managed investment schemes (MIS) are operated by fund managers who similarly have discretion to buy and sell assets based on investor contributions. MIS investors do not directly own the assets of the scheme they own fractional interests in the MIS – referred to as units.

ASIC is cracking down on the softer regulatory environment that has applied to MDAs. From 1 October 2017, MDA Operators will be required to

• meet new disclosure requirements;
• obtain prior written consent from clients before trading in certain recourse-assets;
• report breaches; and
• meet other general regulatory obligations relating to conflicts of interest and best interest duties.

ASIC has also left the door open to further obligations which could include the imposition of regulatory capital requirements like responsible entities and custodians.

With this swathe of new obligations facing MDA Operators, Evolution Trustees believes it is a good opportunity to consider the optimum structure for financial planners whose business are affected. We think that there may be compelling reasons to transition MDA accounts into a single MIS with the appointment of a professional responsible entity. Below are six reasons we think an MIS may be the right approach for some MDA Operators:

1. Conversion of multiple MDA accounts into one pooled MIS reduces administrative burdens and consolidates multiple accounts into one central vehicle;
2. A new regulatory environment from 1 October 2017 may impose greater compliance costs on MDA Operators;
3. Fee structures under an MIS model are typically based on a percentage of funds under management rather than brokerage. Investment management rights attached to a MIS can be on sold;
4. If an MDA Operator takes on an independent responsible entity (RE) for the MIS, the RE takes over the bulk of compliance related activities for the MIS;
5. The assets of MISs are typically held by a licensed and professional custodian, providing robust controls and asset security; and
6. MDA Operators may avoid any future regulatory changes, such as new financial resource requirements that ASIC have hinted may apply.

MDA Operators considering conversion into a MIS should consider several factors when considering an MIS conversion. These include:

• whether CGT rollover relief is available for clients if they transfer their assets into the MIS in exchange for units;
• the costs and benefits of either alternative – including the establishment costs of a MIS;
• AFSL obligations before and after conversion; and, above, all
• Their clients’ best interests.

Rupert Smoker is the CEO of Evolution Trustees, a professional responsible entity and corporate trustee service provider.