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Separately managed accounts are increasingly popular among retail investors who can meet certain minimums — which have been falling — and want enhanced transparency, lower fees, daily liquidity, customization and U.S. tax advantages mutual funds cannot offer.

Previously, retail SMAs were geared only toward high-net-worth investors who could afford minimums like $400,000. Through improved technology and the development of SMA models that use underlying mutual funds and ETFs to gain various market exposures, minimums have come down to as low as $25,000. This has made SMAs accessible to a broader array of investors.

By harnessing new technologies and streamlining operations, SMA sponsors can now offer multi-asset SMAs. These diversifying products are growing more attractive as some asset classes grow less correlated, and I expect them to prove popular.

Over the last decade, retail investors have poured money into market-cap weighted ETFs because of their low costs. SMAs also can provide lower costs, with the added advantage of better diversification for markets that are unlikely to continue going straight up from here.

Buying a diversified SMA from a quality asset allocator can give investors everything they want in one package for a good price, at a low minimum. They need not worry about rebalancing. Investing in an SMA means buying the securities that day, not buying into a commingled vehicle that has large embedded gains — as so many mutual funds do, after years of market runups.

As we move into the next generation of products, investors can buy SMAs that are solutions-based. They may invest, for example, in an SMA that has a target outcome, with low volatility, and mixes equities (international and domestic) with fixed income.

Investor thinking is evolving. For many years, with equity markets steadily rising and inflation persistently low, investors simply wanted to beat the benchmark. Today, many could not care less about benchmarks, or traditional style boxes, and instead want a specific return.

Consider the wants and needs of a 65-year-old recent retiree. He or she will gravitate toward return targets that first exceed the rate of inflation, and then go beyond that to pay out reasonable income over a longer time horizon, with a focus on volatility and risk management. Utilizing traditional investment vehicles to create a diversified portfolio to meet these objectives can prove daunting, but well-chosen SMAs offered by reputable asset managers can help close the gap.

The innovation of outcome-oriented SMA products, including multi-asset solutions with low correlations, has been going on for some time. We now can see hybrid product structures that combine funds and individual securities to provide diversified exposure to less liquid asset classes. By combining individual securities and no-fee funds within a retail SMA, these products can provide investors with cost-effective options to access less liquid asset classes, such as fixed income and emerging market equities, offering broader sets of exposures.

Many advisor firms are collaborating with asset managers in SMA innovation. This has led asset managers to develop “third-party models,” in SMA wrappers, that are offered on the distribution partners’ own proprietary Unified Managed Account (UMA) programs. This kind of blended, multi-asset construction enables the development of products that can be sold at lower minimums.

While multi-asset solutions are available, alternatives have scant application in the SMA space, unless accessed through funds within SMAs. New products likely would access more liquid alternative strategies (such as managed futures, commodities and REITs), but they are not yet prevalent.

What can be said with certainty is the number and variety of SMAs will only continue to increase as asset managers and distribution partners innovate robust new products that seek to meet retail investors’ ever-evolving investment objectives.

— Also by Jeff Masom: How to Help Investors Manage Downside Risk While Achieving Growth


Jeff Masom, CFA, is a senior managing director of all U.S. sales for Legg Mason. Jeff is a member of the Global Distribution Management team, various internal and investment affiliate steering groups as well as the ICI Sales and Marketing committee and SIFMA’s Asset Management committee.

Jeff started his career as an analyst for Smith Barney’s Consulting Group division. He joined Legg Mason in 1997. He holds a Bachelor of Arts degree from Elizabethtown College and a Juris Doctor degree from Delaware Law School. He passed the bar examination in Maryland, Pennsylvania and New Jersey, and is also a Level III candidate in the CFA Program.