For many investors, the only investment vehicles they have been exposed to are mutual funds and exchange-traded funds. Those seeking another option can consider the benefits available in a separately managed account (SMA) to reach their financial goals.
Personalized Approach – Most mutual fund investors will never speak with the person who is managing their money. SMA investors have a different experience. Many SMA managers are small business owners who tend to be more involved with clients and day-to-day operations. This allows SMA managers to reduce the multiple levels between client and portfolio manager, many having one-on-one working relationships.
Direct Ownership – With an SMA, you will benefit from direct ownership of your securities, compared to investing in a mutual fund where your money is pooled with other investors. You will receive regular, comprehensive reporting, including the buying and selling activity in your account. Your account statements show the securities you own, the number of shares, and many other details. And you can check this information at any time. All this information and communication leads to greater transparency and serves as the basis to better understand what you own.
Greater Portfolio Knowledge – When you partner with an advisor to help manage your investments, it is good practice to stay knowledgeable about what you own, to understand the logic behind your investments, and to recognize how those decisions are expected to help you reach your goals. Mutual fund managers communicate quarterly in writing, but it offers no opportunity for a learning dialogue. With direct and personal access to the SMA manager, you can dive as deeply as needed to reach an appropriate level of comfort and understanding. Greater knowledge helps frame appropriate return expectations and limit unpleasant surprises.
Customization – an SMA is not a one-kind fits all. It can be structured to exclude certain investments due to concentrated single-stock positions elsewhere. It can be structured to reflect personal values, restricting companies deemed to be less socially responsible or targeting companies that promote and support certain environmental, social, or governance practices. Or a client investing in an SMA focused on muni bonds could have the manager concentrate holdings in a certain state, plus tailor the account duration and other factors to the client’s situation. Mutual funds will offer no such customization.
Tax Efficiency – Unlike a mutual fund where capital gains from the portfolio are passed along to all shareholders, an SMA investor is only taxed on realized gains in their specific portfolio. Because an SMA contains individual securities, you can decide when to take capital gains and losses based on your tax situation each year. Or instead of realizing capital gains, you can direct your manager to contribute appreciated securities to the charity of your choice. This avoids capital gains tax on the sale and helps meet gifting commitments at the same time.
Cost Competitive – SMA management fees are competitive with, and many times less than, the combined advisor plus mutual fund management fees. Consider too whether your advisor offers other services that may be included in their fee structure. And with trading costs at firms like Schwab and Fidelity going to zero, minimums for an SMA are lower than ever, creating another option for investors.