Separately Managed Accounts (SMAs)

Tuesday, February 8th, 2011 by Cass Chappell, CFP®

It’s time to see if they are right for you

3 Reasons to Consider SMAs

 Executive Summary:

Once an investment vehicle for large institutions or the ultra wealthy, separately managed accounts (SMAs) are now commonly available for as little as $100,000. Separately managed accounts offer investors three potential advantages:

  1. Cost structure which is transparent and usually allows for a decrease in fees as the account size grows;
  2. Actual ownership of stock and bonds, potentially allowing for greater control and flexibility with tax planning issues;
  3. More concentrated portfolio (typically) which allows an emphasis on the “highest conviction” stocks by the portfolio manager.


Click Here for an excellent piece from MFS Investments comparing SMAs to another popular investment vehicle

SMAs are investment accounts, managed by a professional portfolio manager, in which the investments are held in the name of the individual investor.  SMAs are similar to other investment vehicles in a number of positive ways.  It is their differences, however, which make an SMA so attractive to today’s investor. 


Who is investing the money?

In most cases, a portfolio manager is investing the money in the SMA.  Your financial advisor helps to decide when to switch to a new manager or a new investment style.

What do they own?  What do you own?

The answer to those two questions is the same: SMAs own individual stocks and bonds in your name.  A hypothetical portfolio manager might invest your account in 20 different stocks.  Your statement would show these shares.  As an example, you would own 8 shares of ABC inc, 23 shares of ACME co, 15 shares of COMP inc, etc, etc.
In this situation, the SMA manager can focus on her “highest conviction” stocks.  In other words, if only 20 stocks make up her best picks she doesn’t have to also invest in her “b” or even “c” selections to spread the money thinner and avoid becoming an “insider.”


Usually, a financial advisor will evaluate your risk tolerance and objectives and construct a portfolio consisting of several SMAs.  Each SMA is usually in its own account at the financial advisor’s firm.  The advisor will usually add his fee to the fee charged by the SMA manager.   Clients at our firm pay a total fee that includes all trading costs and expenses.  This fee is transparent.  It shows up on your statement as a line item.  The amount you pay in expenses would not be affected by the amount of trading that the manager does. 

The larger your account is, the lower your fee would be in an SMA.  It makes sense.  Charging 1% for an account worth $1,000,000 generates $10,000 in fees annually.  An account worth ten times that wouldn’t need to generate ten times the revenue for the advisor.  He can use the same approach in his pricing that big box retailers do: the more you buy, the less it costs. 


Since the stocks or bonds are held in your name, the cost basis is your own.  There aren’t capital gains and dividend distributions made to you at the end of the year which may, or may not, reflect whether you actually realized the gain.  With SMAs, your taxable gain and loss is figured off of when the manager bought it for you.  For this reason, one could potentially manage their tax situation better.  If the SMA manager has sold several stocks throughout the year, resulting in a net capital gain, you could instruct the SMA manager to sell a few of your “losers” too (usually).  This could help offset any of the gains.  This is called “tax loss harvesting.”

Click Here for an excellent piece from MFS Investments comparing SMA’s to another popular investment vehicle.

SMAs have several features that could make them attractive for investors.  These include: “highest conviction picks” (lower number of holdings), fees, and tax loss harvesting.  Many SMAs have lower minimum investment levels than even a few years ago (typically $100,000).  As always, investors will want to seek diversification in their portfolio by using multiple SMA strategies.

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