What is a Separately Managed Account
Managing an investment portfolio is like taking care of a house. It involves making many important and small decisions to protect and increase its value.
Some tasks you may find yourself adept at handling and perhaps even enjoy doing. Some tasks may be too much to do alone, like roofing, so it's best to hire professionals for help.
Owning a home involves a continuous learning process, much like investing. When deciding if you should do tasks yourself or give them to someone else, think about using separately managed accounts (SMAs). SMAs are favored by knowledgeable investors for their potential to provide control, transparency, and tax efficiency.
What is a separately managed account (SMA)?
A separately managed account is a customized portfolio of individual investments managed professionally to achieve specific financial goals. It serves as a distinct part of your overall investment strategy that you might choose to delegate, allowing you to concentrate on broader investment decisions that align with your comfort level or interests.
SMAs may resemble mutual funds at first glance, but they differ significantly. In an SMA, you directly own the underlying securities within your account. In contrast, when investing in a mutual fund, you own shares of the fund itself rather than the individual investments it holds. This fundamental distinction forms the basis of SMAs.
What is the functioning of an SMA?
When you opt for a separately managed account, you initiate with a portfolio crafted by a professional manager to achieve a specific investment goal aligned with your chosen strategy. As you adjust and refine this portfolio over time, it evolves to reflect your individual investment preferences and needs.
What are the benefits of an SMA?
Owning the underlying securities in an SMA provides complete transparency and the flexibility to customize your account.
You have visibility into your portfolio's contents and can track all trades in real time.
You can personalize your portfolio by excluding specific companies or entire industries according to your preferences.
SMAs may also include tax management strategies aimed at optimizing returns in taxable accounts. Managers can exercise discretion in realizing capital gains and strategically sell underperforming stocks to potentially reduce tax liabilities.
What are the drawbacks of an SMA?
While SMAs offer numerous advantages, like all financial instruments, even the finest separately managed accounts come with drawbacks.
Higher entry requirements: Many SMAs impose significant minimum investment thresholds, typically starting from $50,000 to $100,000. This can restrict access primarily to high-net-worth individuals.
Possible higher expenses: Despite offering personalized and professional management, SMAs often incur higher costs compared to passive investment alternatives such as index funds or ETFs. Investors should carefully consider whether the customization benefits outweigh the associated fees.
Potential for greater involvement: Although the investment manager oversees the securities, investors are still responsible for monitoring and understanding the activities within their portfolio.
What are the costs associated with an SMA?
Professional management comes at a price. Typically, a separately managed account carries an annual advisory fee along with underlying expenses related to the mutual funds or exchange traded funds (ETFs) held within the account.
Is an SMA suitable for you?
SMAs were originally created for wealthy individuals and large investors. Now, they are accessible to a broader range of investors with lower investment requirements.
Today, both traditional separately managed accounts are offered, where an advisor assists in strategy development, and an online-only option. Consider exploring these options if you:
Prefer to control your asset allocation without selecting individual securities.
Seek to supplement your investment knowledge.
Value greater transparency, control, and potential tax advantages over mutual funds.
Bottom Line
Separately managed accounts (SMAs) can be a good choice for people who want professional help managing their money. SMAs are customized to fit your financial goals and offer transparency and potential tax benefits. Whether opting for a traditional SMA with advisor support or an online-only alternative, investors can find a solution that aligns with their investment style and objectives, enhancing their journey towards financial growth and security.
Sources:
https://www.fidelity.com/learning-center/trading-investing/separately-managed-accounts
Disclosures:
This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.
This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.
These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.