Financial professionals have a new tool in their box: separately managed accounts (SMAs).
What makes this new genre worth exploring? Unlike their forerunners, traditional SMAs, todays managed accounts are not just for the ultra-wealthy. They are appropriate for a much broader range of investorssuch as clients who go to work every day, who dont live on trust money, who are still paying for braces or who havent given much thought to the future. This opens up opportunities for you.
What are managed accounts? They are a mix of securities, such as stocks and bonds, managed by a professional money manager. Unlike a typical mutual fund, though, managed accounts can be customized to meet each clients specific financial investment profile and risk tolerance. And, they can offer investors true asset allocation.
Typically, a group of money managers manages the clients portfolio. The managers are responsible for only the portion of the portfolio allocated to their style. For example, a large-cap growth manager only manages money allocated to large-cap growth. This helps keep style drift at bay and also allows managers to leverage their strengths.
Historically, the traditional SMA has required hefty sums$1million or more in investable assets is common. But now, in large part due to technology, the minimum initial investment on many products is now much lower, sometimes as low as $25,000.
This lower minimum is making managed accounts a practical solution for a variety of estate planning needs for people in many net worth categories.
Here are some advantages to consider:
–Managed accounts can be highly customized to accommodate investors social and corporate governance needs.
For example, investors can elect to exclude entire social sectors, such as tobacco companies and nuclear weapons manufacturers, from their portfolio. They also may choose to exclude stocks on a security-by-security basis.
This aspect can be particularly helpful if an investor is a senior executive or board member and is precluded from owning competitors stocks, etc.
Similarly, if an investor is employed by a large corporation and owns shares of that corporations stock in the 401(k), the person can ask that the stock not be purchased for their portfolio to limit exposure to one particular security.
–Managed accounts can help investors manage their tax needs proactively.
Many platforms offer a variety of tax “lot-selling” preferences, which can help investors manage their capital gains and losses throughout the year. For example, if an investor is facing a large capital gain as a result of selling a piece of real estate, the portfolio can be adjusted quickly to harvest losses through the end of the year to offset the gain.
–Managed accounts offer investors the ability to know what they own all the time.
Investors know every stock that is held in the portfolio and exactly what they are paying for that portfolio to be managed. By contrast, mutual funds currently are required to report holdings only two times a year in their annual and semi-annual reports.
–Many managed account platforms are Web-based.
This allows investors to access their current portfolio holdings, transaction history, statements, performance reports and much more any time of day or night. Internet access also allows todays financial professional to serve as the hub of the estate management team. For example, the professional can use the online tools to:
Establish risk tolerance;
Identify investment utilization needs (college, retirement, wealth transfer, etc.);
Determine any investment exclusions (international securities, high yield bonds, social exclusions or specific holdings); and,
Spot tax planning concerns.
When provided by a registered investment advisor that assumes fiduciary responsibility for the account, this technology allows you, the advisor, to focus on managing the client relationship and coordinating with other experts on the long-term plan.
–Managed accounts can fit into a practice that serves the “working affluent.”
Such clients have a solid income stream but have not amassed large sums of discretionary assets. Despite that lack of accumulated wealth, these investors still require a solution tailored to their individual needs.
Some of these investors require a savings strategy that includes a life insurance program, for example, but, though generally educated and thoughtful, many tend not to consider mortality and so may be leaving their familys future underfunded. Their short-term savings view precludes them from using tax-deferred savings vehicles.
Furthermore, though many are independent and have opinions about what they do not want to be included in their investment portfolio, they consistently seek advice.
Reviewing their statement, you may find that appropriate coverage for this type of client includes a term life insurance policy that corresponds with the timeline of the primary spending needs. Savings needs can be met using a managed account that provides you, the valued financial professional, with the ability to monitor their holdings, manage tax implications and immediately respond to changing needs.
In sum, the new managed accounts enable you to tailor solutions to individual needs, coordinate efficiently with the clients other professionals and put you in the drivers seat of the clients wealth management team.
is vice president of business development at Curian Capital LLC, Denver, Colo. His e-mail address is firstname.lastname@example.org.
Reproduced from National Underwriter Life & Health/Financial Services Edition, December 5, 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.