Similar to ETFs or mutual funds, a separately managed account (SMA) is a portfolio of securities in which a person may invest. However, unlike mutual funds or ETFs, when you invest in an SMA, you own the securities inside your portfolio. This means SMA owners have more flexibility in the investment and management of the funds. SMA investors can also monitor trades in real-time.
Professional money managers run SMAs, and while associated fees may be higher than those of mutual funds, SMAs may provide you with more responsive management of your investments. If you want greater control and transparency in your portfolio, SMAs might be an excellent investment option.
If you don’t already have a retirement income planner or financial advisor, you should find one whose approach best aligns with your money goals and risk tolerance. Since SMAs typically require a more significant initial investment, they could be a wise choice for those with more cash to invest upfront. As with any investment, however, you must do your due diligence and research before considering an SMA.
Why consider an SMA?
As mentioned, increased control and flexibility make SMAs attractive to some investors, as well as the enhanced transparency they offer. Other kinds of “pooled” vehicles are geared more to the needs of a group of investors, while an SMAs strategy is explicitly designed for its owner. Unlike a mutual fund, an SMA’s value is not affected by the actions and investment strategies of the group.
Investors cite numerous reasons for choosing SMAs, including:
SMAs allow for a more personalized approach. SMA owners typically have different experiences with their managers, who tend to be more client-focused and involved with the fund’s daily operations. Most of the time, participants in mutual funds or ETFs will never have a chance to talk to the fund’s manager. Many SMA managers strive to create greater accessibility with their clients and to maintain one-on-one relationships.
An SMA is not a cookie-cutter option. SMAs, unlike other investment models, are not one-size-fits-all. For instance, they may be custom tailored to exclude certain investments or designed to reflect personal values or environmental or social concerns. Mutual funds offer no such customization.
You own an SMA directly. In a mutual fund, the fund holds the assets. Your money is added to that of other investors. You are then a shareholder in the fund and are one level removed from your investments.
In an SMA, you will directly own the securities in that account. Account assets are registered in your name instead of the funds. Your SMA account statements show which securities you own and how many shares you have, among other critical details. Your SMAs comprehensive reporting may improve transparency and help you better understand your investments.
SMA fees are competitive. Management fees for an SMA are usually highly competitive with those of mutual funds or ETFs. In some instances, they could be less than assets under management fees charged by advisors using mutual or exchange-traded funds. SMAs were initially treated as investment vehicles for high-net-worth investors. Accordingly, they tended to charge higher fees. However, as they’ve become more accessible to smaller investors, many SMAs are less expensive and have lower minimums.
SMAs may have more tax efficiency. In a mutual fund, capital gains from the portfolio get passed along to all shareholders in taxable accounts. In contrast, SMA investors only pay taxes on realized gains in their specific portfolio.
Since an SMA contains individual securities, you and your manager can decide when you will take capital gains and losses based on your unique situation. You can also have your manager contribute appreciated securities to a charity and thus avoid capital gains tax on the sale.
Talk to your financial planner or tax advisor to discover more about potential SMA tax advantages.
Are there downsides to SMAs?
Even though they offer some attractive advantages, separately managed accounts are not beneficial for all investors. For one thing, the barrier to entry might be too high for many. Although initial deposit requirements are trending downward, opening an account can still cost as much as $50-$100,000. Also, some experts say that SMAs tracking indexes may have higher tracking errors than mutual funds or ETFs tracking the same indexes.
Instead of paying more significant fees associated with SMAs, many investors successfully use generic funds to build their portfolios. SMAs are hindered somewhat by their economies of scale. While mutual funds and ETFs pull money from multiple investors, an SMA has only one investor. This structure necessitates higher administrative costs and fees. Average-sized mutual funds will nearly always have cost advantages over SMAs, prices that show up in expense ratios, and higher trading costs.
Bottom line: With any investment product or strategy, thorough research, information, and a trustworthy financial advisor are critical to success. SMAs are no exception. While they might work well in a pre-retiree or retiree’s portfolio, they are not magic bullets. There are certain aspects of investing where an SMA might make sense and others where they won’t shine as brightly. Nevertheless, suppose you are someone with tax planning concerns or you want and need specific customization in your investment matrix. In that case, you should discuss SMAs with your financial professional to determine if their benefits are worth the increased expense.