Separately managed accounts (SMAs) are popular investment vehicles that historically have been accessible only to institutional and wealthy individual investors. Today, primarily because of technology, individual investors with even modest-sized accounts can also invest in SMAs. However, as with any investment vehicle, SMAs can have both benefits and disadvantages. Read on to learn more about what SMAs are and what they offer to investors. Additionally, we describe a way advisors can offer clients the benefits of SMAs while minimizing their disadvantages.
What are SMAs?
In a separately managed account, investors directly own the individual securities in the account with an investment professional selecting the securities and managing the account for the investor. Investing in an SMA may seem simple at first glance: just find a money manager and open an account. It is not that easy.
Pros of SMAs
1. SMAs provide direct ownership of securities
With an SMA, investors directly own the securities in the account, which is unlike investing in a mutual fund, where investors do not directly own the securities in the fund. This means that SMA investors will not suffer from the “hidden costs” that can sneak up on commingled investors in a mutual fund. If you are unaware of the hidden costs of mutual funds, then please check out our blog on the pros and cons of investing in mutual funds.
2. SMAs can be tax efficient
By owning securities directly in an SMA, investors do not suffer from the embedded capital gains problem that mutual funds suffer. In addition, because SMAs are not bundled investments like an ETF or mutual fund, SMA investors can tax loss harvest on individual securities.
3. SMAs are transparent
When you own an SMA, you will always know the individual securities that you own, even on any day and at any hour, unlike owning mutual funds, which are only required to report holdings four times per year. SMA investors do not suffer from this lack of transparency.
4. SMAs may outperform benchmarks
Because SMAs are professionally managed and do not suffer from the hidden costs of mutual funds, it is possible for them to beat benchmarks. For example, the Wall Street Journal reported that SMA performance beat that of mutual funds during the 2008 financial crisis. The same article also cites a Morningstar study that found SMAs had routinely outperformed mutual funds prior to 2008.
Cons of SMAs
1. You may need to be rich to invest in some SMAs
Many SMA managers require high minimum account values. For many SMA managers this is driven by the need to properly diversify the portfolio, and in other cases the manager may feel it is not worth its time and effort to select and manage securities in an SMA for individual investors with small investment accounts.
2. SMA fees can be unpredictable
Some SMA providers may have complicated ways of charging their clients and have a variety of different fees.
3. A single SMA manager may not be an expert on every investment strategy and every asset class
It is unlikely that one SMA manager can be an expert on every investment strategy and be an expert on all asset categories. For example, an investment professional may be good at picking value stocks but not growth stocks. Maybe it is good at picking US securities but not knowledgeable about emerging markets securities. Maybe it is an expert on traditional investments, such as stocks and bonds, but not knowledgeable about alternative investments, such as commodities and real estate. And finally, maybe it is an expert on tactical investing but not on strategic investing. In other words, by having an SMA that is overseen by a single manager, investors can be under-diversified, and also over-reliant on one manager’s expertise. Of course, a simple solution may be to hire two or more SMA managers, but do not forget that individual SMA managers may require high minimum accounts.
Turnkey Asset Management Programs Provide SMA Accessibility
A turnkey asset management platform (TAMP) can offer SMAs without the above disadvantages. A TAMP uses technology to provide and to efficiently manage numerous investment vehicles. A TAMP can also use its technology to make multiple professional money managers available to individual investors with modest sized accounts.
TAMPs can offer SMAs to investors with low minimum accounts
While some SMA managers may require high minimums, it is possible to own an SMA with low minimums through a TAMP. With today’s technology, trading, billing, and reporting can be automated, which can bring down operating and administrative costs. However, for a single SMA manager to enable all of this automation, the cost can be prohibitive. Because a TAMP can provide the automation for many money managers, it can bring down these costs on a per account basis due to its scale.
In addition, most TAMPs do not have to pay very high fees to the money managers. After all, the money managers are not doing any of the trading and administrating. These cost savings can be passed along to financial advisors so that they can pass along the savings to their clients.
TAMPs can offer predictable fees
TAMPs can be incentivized to have simple and understandable fees. With so many different SMAs and so many different SMA managers on its platform, the last thing that a TAMP may want to do is to make the fees complicated. One of the main reasons why TAMPs exist is to make it easy for individual investors to invest in SMAs.
TAMPs can give investors access to multiple money managers
With a TAMP, it is possible to have multiple money managers oversee your investment account. This way, investors can avoid being under-diversified, and avoid being over-reliant on a single money manager. Such accounts, in which one can own multiple investment vehicles and have multiple money managers, are unified managed accounts (UMAs). Of course, individual investors do not need to make the tough decisions of which money managers or investment strategies to choose. A financial advisor can do this for you.
Advisory services are offered through EQIS Capital Management, Inc. ("EQIS"), a registered investment adviser. EQIS does not provide tax or legal advice. The information contained herein is for informational purposes only. This is not an offer to sell securities or provide investment advice. Investment strategies carry varying degrees of risk to include total loss. Diversification does not ensure a profit nor protect against loss. The representations and opinions herein are the opinions and view of EQIS and are believed to be reliable but are not guaranteed by EQIS nor its affiliates. When applicable, sources used in forming EQIS’s opinion are cited, however, other sources may be available which contradict EQIS’s opinion, process, and methodology.