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If you offer mutual funds, you have likely noticed the buzz on separately managed account programs.

Because SMAs have become so popular in recent years, I will step back to review their basics in comparison to mutual funds, touch on advantages driving their popularity and provide a context regarding the type of investor for which this product may be suitable.

SMA Basics– The Next Generation of Portfolio Management.

Like a mutual fund, an SMA is a way to access professional money management, constructing a portfolio of stocks and/or bonds to pursue a financial objective. However, SMAs can offer additional benefits of flexibility, customization and service.

–Flexibility. Unlike a mutual fund, where investors share a common portfolio and buy individual fund shares, securities in an SMA are owned directly by the investor. The SMA is not required to distribute income on a regular basis, allowing the potential to manage for greater tax efficiency. Because each SMA portfolio is managed to conform to the individual investors objective, the portfolio may not experience the performance drag that trading costs and liquidation needs may produce in a mutual fund.

–Customization. A mutual fund is a “one size fits all” approach to investing. Your client invests in the same strategy as thousands of other shareholders. The hallmark of an SMA is its flexibility; a strategy can be tailored to the specific goals and tax status of the individual client. For instance, a client may have the ability to restrict certain securities within the portfolio.

–Service. An SMA program provides services not available with a mutual fund. These include assistance with developing an investment policy statement, active asset allocation geared to the client, sophisticated portfolio analytics and measurement, and the ability to view portfolio holdings on a daily basis, if requested. The investor usually pays one fee for these services, ensuring no hidden costs.

In short, by offering an SMA program, you are offering a customized wealth management strategy.

Suitability– Who Should Buy a SMA.

The degree of investment flexibility, customization and service just described traditionally has been available only to affluent investors, generally those with more than $250,000 in assets to invest. An SMA is not right for everyone but can be a very appropriate vehicle under the right circumstances. Reaching the decision with your client on whether and how to invest in an SMA is a complex process and depends on his or her portfolio size, tax situation and risk tolerance.

–Size of Portfolio. Although the investment thresholds for many separate account programs are being lowered, traditional minimums per strategy are usually $125,000, making it difficult to get sufficient diversification for less than $250,000.

–Client Tax Status. An SMA may be appropriate for affluent investors looking to lower investment expenses or, in certain cases, have more ability to manage tax exposure actively.

–Client Life Stage & Risk Tolerance. An SMA program may be appropriate for someone with a large amount of assets and the need for personal attention in managing them. Beyond the traditional affluent investor, some candidates for SMAs include those with an IRA rollover, selling a business, winning a financial settlement or receiving an inheritance.

As discussed, an SMA is a customized wealth management strategy and should be presented as such to your affluent clientele. And your approach to an SMA client needs to be more specialized, comprehensive and consultative. SMA providers, or “platforms,” will provide all of the support needed to serve this client, but ultimately you own the relationship.

Growing PopularityAccompanied By Growing Responsibility.

In the 1990s, it seemed investors and advisors could do no wrong as the market consistently advanced. Today, we face a much more complex and challenging environment. Investors still want growth but also are more concerned about preserving and protecting their retirement nest egg. Many are seeking a greater level of expertise and are receptive to sophisticated approaches that pursue growth while managing downside risk.

As individual investors, they are looking for high-quality tools, advice and investment capabilities often available only to large institutions. This is especially true for affluent investors, whose primary concern may not always be to beat the market every year, but rather to preserve their assets, sustain them through retirement and leave a legacy for loved ones.

It is not surprising that SMAs have become so popular despite the challenging markets of recent years. The markets, in fact, have underscored the advantages this vehicle can potentially deliver. SMAs are beginning to show growth similar to that observed in the mutual fund industry in the 80s and early 90s.

In fact, the industry recently topped a half trillion dollars, with $506.63 billion at the end of 2003, according to the Money Management Institute. SMAs grew 29% in overall assets last year and projections for assets at the end of 2005 range from $700 billion to $800 billion. These projections are based on asset figures from a survey of managed account sponsor firms conducted by the Money Management Institute.

Now, advances in technology and product design have led to more accessible, lower minimum, separately managed account products. Companies are introducing “next generation” SMA products offering many of the same benefits we have discussed but at a much lower entry point.

Some new products, generally referred to as MDAs, or multi-discipline accounts, actually offer managed account access for as low as $25,000. In general, we believe that broadening access to this type of program is a good thing, but suitability is key. While an SMA may be appropriate for a certain subset of clientele, it is up to you to make sure you present the right product to the right client in an appropriate way.

is a vice president of portfolio management with GE Private Asset Management (GEPAM), based in Sherman Oaks, Calif. He can be reached at ronald.rough@ge.com.


Reproduced from National Underwriter Edition, July 22, 2004. Copyright 2004 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.