Flexibility Is Making SMAs More Popular With Advisors

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New York

The main distribution channel for separately managed accounts are wire houses, but the flexibility of SMAs is driving more and more financial advisors to use them, according to Michael Evans.

The vice president and consultant for Financial Research Corporation, Boston, spoke recently at a Money Management Institute event here.

“Advisors will start using SMAs in their portfolios more commonly,” he said. “It will be the core of the high-net-worth portfolio.”

Experts agree SMAs are most advantageous for the high-net-worth investor with at least $350,000 in investable assets, because a certain amount of money is placed into many accounts.

In order for the rate of return for each account to be worthwhile for the investor and in order to pay the fees involved, there needs to be a high enough figure in each one.

“The reason SMAs are attractive is theyre customizable, unlike a hedge fund or mutual fund where you buy them and everyone gets the same thing,” says Leonard Reinhart, president, The Bank of New York Separate Account Services, New York.

And, because an investor directly owns the securities within the account, she can specify investment restrictions and can request tax-loss selling.

“A mutual fund has both taxable and nontaxable investors in it, if youre in an SMA and youre a taxable client, your manager runs your portfolio to maximize the tax benefits for you,” Reinhart says.

Another way SMAs are customized is “fulfillment management,” he says.

“Say youre an executive at IBM and own stock and stock options in your portfolio, you probably should stay away from technology,” he says. “So you can tell your manager you dont want any tech stocks or IBM stocks. [Fulfillment management] creates a portfolio around the other investments the client might have.”

Unlike hedge funds or mutual funds, SMAs are changeable, Reinhart said.

“You can see every holding every day,” he said. “You can see what the manager is buying and selling. You can influence the outcome, and thats why it works well in the middle of other products.”

In other words, the manager can manipulate the SMA to accommodate the strengths and failings of the clients other investments.

Another reason financial advisors are moving toward SMAs is that they give them a way to keep their clients from making decisions based on emotion and get them to behave more like institutions, said John Sharry, president, Private Client Group, Phoenix Investment Partners, Hartford, Conn. He spoke at the MMI event mentioned above.

“People want to do what institutions have done,” he said. “Make money in spite of volatility because (SMAs) are diversified and rebalanced as needed.”

The high-net-worth strategy based on an SMA model involves long-term consulting with clear investment objectives, and a clear understanding of the clients tax situation and estate planning needs, Sharry said.

“So when an investor makes more money, you automatically know what to do with it,” he said.

The client fills out a detailed questionnaire about goals and how much she is willing to save to reach those goals. Because of the bear market, people generally are more willing now than they have been in the past to fill out the questionnaire and stick with what theyve planned based on it, Sharry said.

In the consulting process, the advisor calculates the probability of reaching the clients objectives given her financial status; determines decline potential; determines the impact of the clients contributions and withdrawals; weighs wealth accumulation potential vs. short-term decline potential; and adjusts all the above variables, Sharry said.

“Once the strategy is set up you track the results,” he said. “Its ongoing monitoring and adjustment, managing expectations and setting up strategies to achieve them.”

The appeal of SMAs seems to be catching on. TowerGroup, Needham, Mass., predicts “assets in managed accounts to grow at a compound annual growth rate of 18.5% from $399.7 billion in 2001 to $1,105 billion in 2007.

“Within the next 15 years, these vehicles will hold the dominant share of all direct ownership of equities and bonds by retail investors,” the company says.


Reproduced from National Underwriter Edition, June 16, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.