Separately Managed Accounts (SMAs) offer many benefits to clients compared to traditional mutual funds and other alternative investment options such as pooled funds and wrap programs. Pooled funds and wrap programs are different structures of the standard mutual fund, offering some degree of portfolio customization for a flat fee. SMAs provide clients all of the benefits that mutual funds offer such as professional management, diversification, and liquidity but unlike a mutual fund, a separate account does not pool your money with other investors’ money.
SMAs are accounts that are managed separately for each unique client as opposed to mutual funds which are managed for multiple investors as a group. In a SMA portfolio, the money manager is purchasing the securities in the portfolio on behalf of the client and not on behalf of a fund. A major feature of an SMA portfolio is that the underlying investment assets are directly held in stocks and bonds that are professionally managed. Assets are held beneficially in client name as opposed to traditional mutual funds where investors own units in a trust. Ownership of the underlying assets results increased transparency, more control to efficiently managing tax liabilities and the ability to customize portfolios based on each client’s unique circumstances.
The benefits of SMAs have made them popular with high net worth clients and institutional investors. Until recently individuals could only get access to these institutional money managers if they had million dollars to invest; however advances in computer technology has improved back office efficiencies and has made it cost effective for investment management companies to offer SMA solutions to a broader range of clients due to the lower account minimums required. SMA portfolios provide investors with a number of benefits including:
- Individual Security Ownership: SMA investors are the beneficial owners of the underlying securities which offer several advantages, including no imbedded realized capital gains, ongoing tax control, and customization.
- Customization: one of the great benefits of SMAs is the ability to customize each portfolio based on the unique circumstances of each client. Investors may be able to incorporate existing holdings in a SMA portfolio whereas mutual funds do not provide that flexibility. Owning the underlying securities directly allows for additional customization. For example, a client may wish to avoid a particular industry or company due to ethical reasons or because too much of their net worth is tied to it.
- Tax Efficiency: the potential for tax efficiency is another advantage of SMA portfolios. In a mutual or pooled fund your investment can be influenced by other investors. For example, if a number of investors request redemptions the portfolio manager may be forced to sell a large stake in a security they like because they need to raise cash to fund the redemptions. Clients may owe a tax on the distribution even though they owned the fund for a few days or weeks. In a SMA other investors’ decisions will not affect the client because they own each of the securities in the portfolio. Another advantage is the lack of embedded capital gains. When clients invest in a SMA portfolio the clients cost basis in any of the shares the portfolio will own on your behalf are based on their value the day you made your investment. Clients will incur capital gains taxes only when individual securities are sold at gain. Other tax optimization strategies such as tax loss selling and transferring securities in kind provide opportunities to better manage a client’s tax situation.
- Transparency and Fees: individual portfolio holdings, transaction details and market values are available to clients at all times. Clients know every investment held in their portfolios at all times and can easily identify the fees paid. The SMA fee is transparent, predictable and tax deductible in certain circumstances. The fee is a fixed percentage of the assets and there are no additional custodial and trading fees. An SMA portfolio may also provide the potential for lower management fees.
- Consolidated Reporting: clients benefit from a single consolidated investment report that provides SMA detailed descriptions of recent transactions and current holdings, asset allocation, management commentary and investment income. The consolidated quarterly reports give clients a detailed look at how their investments are performing versus their benchmarks.
- Professional Money Management: clients benefit by having access to some of the best money managers in the industry with proven track records for providing reliable risk adjusted returns. Clients benefit from accessing a wide variety of investment managers representing a blend of styles and strategies. This Multi Manager Approach in choices is critical to building a well diversified portfolio.
- Overlay Portfolio Management: the overlay portfolio manager coordinates all the activities between the investments managers and changes to a client’s portfolio.