Alphabet soup or a recipe for building wealth?

Robert White

In reading about the options for wealth management and retirement income planning, one increasingly encounters reference to MDAs, SMAs and IMAs.

Robert White

In reading about the options for wealth management and retirement income planning, one increasingly encounters reference to MDAs, SMAs and IMAs.


The terms are often used interchangeably and can cause confusion for even the most seasoned investor or adviser. Many will not know the actual differences between a Managed Discretionary Account (MDA), a Separately Managed Account (SMA) and an Individually Managed Account (IMA).

Here is a brief attempt at a layman’s overview.

Generally speaking, the term MDA or Managed Discretionary Accounts, is used as a cover-all name for accounts that involve the investor giving discretionary power to an investment or portfolio manager to make investment decisions on behalf of the investor. Crucially, the investments are beneficially held in the investor’s name.

The most frequent comparison is with a managed fund, where the investor buys units in another entity, namely the fund, rather than directly owning the underlying investments.

There are two main account types that fall under the managed account umbrella: SMAs and IMAs.

A Separately Managed Account (SMA) is a portfolio of direct stocks beneficially owned by the client managed on their behalf by a professional portfolio manager. The account is managed according to a model portfolio, with each investor holding the same investments that make up the model portfolio.

As a result, when the SMA portfolio manager makes changes or adjustments to the portfolio, these changes are made to all investors’ holdings, in proportion to their original investment. Importantly, the manager can’t and doesn’t take into account the individual position or needs of each investor, such as the capital gains and loss positions and other tax implications.

Because of their relatively simple nature, the fees associated with an SMA are generally the lowest of all of the discretionary account types. Other benefits include the peace of mind associated with a skilled professional managing the portfolio. The underlying rationale is that a better outcome will be achieved than if a non-professional investor were making the investment decisions. It has been described as rational or reasoned outsourcing.

An Individually Managed Account (IMA), as the name suggests, is a direct equities portfolio managed by a portfolio manager specifically for one individual investor. It takes account of the specific needs of that investor. Hence the manager, when making buy, sell and hold decisions, takes account of the specific tax implications (and any other implications) of each option as they relate to that client. Accordingly, there is a greater level of work entailed in an IMA and they are usually the most expensive form of discretionary account in terms of fees charged. They also usually have a higher minimum investment amount than an SMA.

Improvements in technology have seen the fees charged for all discretionary accounts come down gradually, as have the minimum amounts required before a manager will take on such accounts. IMAs typically would have a minimum threshold in the order or $250,000 to $500,000, while an SMA may have a minimum of as little as $20,000.

Both forms of accounts have the attraction of being totally transparent, i.e. the client can see what’s happening to their money at any time.

In deciding what, if any, discretionary account option is right for any single investor or SMSF, it’s a case of deciding which option suits one’s particular circumstances and paying for what you want or need.

The reasons for the increasing popularity of discretionary accounts include: the ability to engage a highly skilled professional to help build ones wealth; the ability to transfer existing investments into and out of a discretionary arrangement without triggering a capital event provided there is no change in beneficial ownership; discretionary portfolios do not inherit capital gains as may occur with investments in managed funds; and, a hassle-free experience whereby all portfolio administration is undertaken by the platform provider, including corporate actions, dividends tax record-keeping and reporting.

 



About Robert White

Robert White

Robert White is chief executive officer of Dalton Nicol Reid. Robert has significant experience spanning nearly 20 years in the financial services industry gained through working in the United Kingdom, Europe and Australia. He joined Dalton Nicol Reid in March 2014 and is responsible for driving strategy and business management and he also oversees Business Development and Client Services.

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