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.