Managed Discretionary Accounts

The managed account industry in the United States is huge. Research firm Cerulli Associates values the US sector at US$1.8 trillion in the first quarter of 2007. In Australia, managed accounts are well established and growing in popularity as investors look for tax-effective, transparent alternatives to managed funds.

What is a Managed Discretionary Account (MDA)?

An MDA is a portfolio of securities that is selected and managed by a professional investment manager but held in the name of the investor. The investor gives the investment manager the discretion to trade for them, within an agreed mandate. For example, the mandate for the Cygnet Managed Account offered by Cygnet Capital, is to invest in high growth potential microcap stocks, specifically Australian Stock Exchange–listed and soon-to-list companies valued under $200 million. An MDA typically incurs a management fee which covers advice, administration and tax reporting and may also attract a performance fee.

There are two types of MDAs:

<            Individually Managed Accounts (IMA): With an IMA, an investment manager designs a portfolio that is tailored to the personal circumstances of the individual.

<           Separately Managed Accounts (SMA): An SMA is based on a model portfolio that follows a specific investment strategy and each investor’s portfolio reflects the weightings of the model portfolio. The minimum investment is typically less than an IMA.

Advantages of an MDA over a Managed Fund

<          Direct Ownership

All the securities are held in the investor’s name. With a managed fund, investors own units in the fund, which in turn owns the underlying assets.

<          No Embedded Capital Gains

When you buy units in a fund you may also inherit a capital gains liability. This liability is shared amongst all investors over the tax period, even those who were not unit holders when the asset was sold. MDAs avoid this problem as investors funds are not pooled together.

<            Transparency

Investors can view the performance of the individual securities comprising their MDA. Only the unit price can typically be monitored in a fund.

<            Flexibility

Unlike managed funds, some MDAs allow a degree of customisation. For example, an investor may wish to exclude nuclear industry stocks.

<            Portability

As the investor owns the securities, they can choose 
to move their portfolio or manage it themselves without needing to sell the securities. To exit a managed fund, you must sell your units which may have capital gains implications.

Advantages of an MDA over Traditional Stockbroking

<            Aligned interests

            Brokers are paid per trade but most MDA remuneration is based on performance.

<          Time Saving

            MDAs appeal to people who do not have the time or expertise to manage their own portfolio or be involved in every trade that their broker makes.

<           Service Equality

            Broking is service intensive therefore clients with more invested typically receive greater attention. Each MDA is based on a model portfolio which promotes greater equality of service.

<           Record-keeping

            A broking client traditionally manages their own paperwork whereas MDA clients have all the record-keeping and administration managed for them.

Managed Discretionary Accounts are not suitable for everyone therefore it’s important that you consider your own personal circumstances and investment goals before making any financial decisions.

Characteristic	Managed Account	Broking Account	Managed Fund
Investment Decisions	Discretionary	Non-discretionary	Discretionary
Ownership of securities	Direct / beneficial	Direct / beneficial	Indirect via units in a trust
Units	Not unitised	Not unitised	Unitised
Investment Strategy	Based on model portfolio(SMA) or personalised(IMA)	Personalised	Based on single portfolio

 * Key characteristicsof a Managed Acount, Broking Acount and Managed Fund