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Managed discretionary accounts (MDAs) have become an increasingly popular option for self-managed super fund (SMSF) investors. This is because, unlike managed funds, the SMSF members remain the beneficial owners of the underlying assets in the structure. They also offer considerable tax benefits. There are lots of other potential benefits to using MDAs in an SMSF…
Control and flexibility
MDAs are a portfolio management and investment administration service in which trustees agree for the provider to manage investments without consulting the trustees, as long as the investments are managed within agreed parameters. They offer SMSFs benefits because they give members better control and flexibility over their assets compared to a managed fund.
Some of the assets in which they may invest include Australian listed investments such as shares, listed bonds and debt, listed investment companies (LICs), exchange-traded funds (ETFs), foreign listed investments (such as shares and ETFs), managed funds across all asset classes, unlisted bonds, term deposits and cash.
Choice and range
MDAs cover a wide range of investment styles and SMSF investors can pick and choose between them. For example, if the stock market is at the end of a bull run, SMSF trustees may choose to allocate funds to an MDA that’s defensive. Some also allow members to exclude investments such as gambling or alcohol stocks.
They may suit SMSFs that are managed by someone who is time-poor or someone who doesn’t have the necessary investment experience or confidence to run one. They may be suitable when the investment performance hasn’t met the members’ goals. They can also be used to manage all, or part, of the SMSF’s investments.
“Investors can choose one or more MDA providers to diversify their portfolios. For example, an SMSF investor may wish to have exposure to small cap stocks for extra volatility and growth but would rather an MDA provider manage this for them,” explains Dale Gillham, founder of wealth management business, Wealth Within.
Each investor in an MDA has a discrete portfolio so there’s no embedded capital gains tax position included in a unit price, as is the case for a managed fund. “A decision by a portfolio manager to buy or sell shares for another investor has no impact on the SMSF’s tax position,” explains MDA specialist David Heather, principal of DAH Advisory.
“Portfolios can be constructed to take advantage of franking credits, which can be advantageous for SMSF members who are in pension phase. This can be achieved through acquiring shares in companies that pay fully-franked dividends but also in taking up buy-back opportunities that include franked dividend benefits,” he adds.
Additionally, MDA investments can be transferred between providers or out of the MDA without needing to liquidate the fund or incur capital gains tax.
Taking a more active approach
Compared to managed funds, investors typically need to be more involved in selecting MDAs and more active in monitoring them to ensure their investment goals are being met.
“They typically have higher fees than an industry or passive index fund. They work well in an SMSF if the investor takes a bigger picture approach to portfolio construction. Investors can achieve balance in their portfolio by investing in defensive MDAs that produce income, balancing these with funds that provide higher growth,” says Gillham.
MDAs can also add to compliance costs, depending on the number of transactions done in a financial year. But they can also help drive returns.
“Often, the decision to invest in an MDA is based largely on how low the fees are, but this can be a false economy. Attempting to save 0.5 per cent to one per cent in fees can affect your overall returns. A more active MDA requires more management, hence why they may they charge slightly higher fees. But the returns can be much higher than a more passively managed MDA,” Gillham adds.
Case in point
David Heather gives a hypothetical example of how MDAs work in practice. In the example, Bill and Wilma are the trustees and members of the XYZ Superannuation Fund, an SMSF, and are both in pension phase.
“Historically, Bill has had some investment experience and currently selects the investments in the SMSF, based on research. The SMSF portfolio consisted of 30 ASX-listed shares for Australian share and property exposure, some ETFs for exposure to international shares, three term deposits and some cash across its $1 million balance,” he explains.
But Bill and Wilma travel frequently and he has trouble keeping on top of investment decision making, completing paperwork for corporate actions and term deposits, reconciliation of the SMSF bank account to ensure all income is received and generally keeping on top of admin. Bill has missed three opportunities to participate in share purchase plans because he missed deadlines for returning documents and making payments when he was travelling.
So, Bill and Wilma reviewed their options and determined an MDA was a suitable investment vehicle for them to use as they wished to continue to have the majority of their investments in direct listed investments. They also wanted to know what was going on in the portfolio while they travelled and were able to agree an investment strategy and investment program with an MDA provider.
They want three of their existing investments be retained in the MDA but are able to outsource the management of the majority of the portfolio to the MDA provider. The MDA provider is able to include asset allocations in the investment program that are consistent with the SMSF’s investment strategy.
The advantages an SMSF can gain from MDAs depends on the type of investments held in the SMSF, the size of the SMSF and other factors.
“You don’t have to outsource the SMSF’s complete management when you elect to use an MDA. Outsourcing the Australian share component while maintaining management of the remaining assets may work for one SMSF, while outsourcing international share exposures may work for another,” Heather explains.
There are many MDA providers in the market. The best approach is to understand your requirements and take the time to review the various options to ensure you select the provider that best meets your needs.