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The pros and cons of separately managed accounts (SMAs) : INVESTMENT

Today, there is a growing demand for professional fiduciary financial management services through the separately managed accounts mechanism, particularly by high net worth investors. Individual investors, who are considered “wealthy” compared to the average middle-income retail investor, are increasingly turning to Separately Managed Accounts (SMAs) to obtain personalized professional fund management services and tax benefits. DarcMatter has decided to juxtapose SMAs with the well-known traditional mutual fund, hoping to provide wider context and a better understanding of the nuances of an SMA.

A Separately Managed Account (SMA) is a portfolio of assets that are managed by a professional investment firm as defined by Investopedia. There are two types of SMAs: single and multiple. Although minimum investment amounts vary between asset managers and $ 100,000 is a typical low threshold, a single style SMA may only allow investors $ 50,000 for stock portfolios and $ 100,000 for fixed income portfolios. These SMAs are structured with a specific investment style. A Multiple style SMA can be suitable if you want to invest in a different investment style as this type represents a diversified portfolio with investments across different asset classes and even between different managers, although one manager oversees all investments. The minimum investment is usually $ 100,000 to $ 300,000. Creating a single style SMA provides a diversified portfolio that can help avoid the overlap of stocks and overly concentrated positions that you often encounter Combine investment styles without the benefit of a multi-style SMA. While SMAs are similar to both personal and institutional investment product vehicles in that they are made up of stocks, bonds, cash, or other professionally managed individual stocks, there are some key differentiators.

With investment funds, for example, small investors can pool capital in a professionally managed portfolio and participate in returns or losses in proportion to their contributions. These funds employ an overarching capital allocation strategy for the entire fund that applies equally to all investors. SMAs have the advantage of a more detailed approach that is specifically tailored to the investor’s goals. In other words, while mutual funds make decisions on behalf of everyone involved, SMA managers can essentially make decisions in your name for the portfolio on an individual level. In this way, SMAs offer mass customization. They offer a package of individually selected financial solutions by the professional, but give the investor the feeling that they are more aware of the decisions relating to their account. For example, SMA investors may choose to limit “sin” stocks. This is possible because the investor is the direct owner of the securities purchased, a fundamental differentiator for managed accounts, and can adjust the composition of the portfolio together with the manager. Even if a mutual fund and an SMA should have the same exact composition of assets with identical weightings, an SMA allows the flexibility to change even a single position in their portfolios if desired. This is a benefit of portfolio management that mutual funds cannot provide because of the nature of the purpose and mandate of the vehicle to manage the same investment strategy for all investors. Both offer professional money management services, but SMAs do not require pooling of capital with others.

Another important characteristic for SMAs is the minimum investment required. SMAs, for which the standard minimum is $ 100,000, are primarily available to wealthy investors and are offered by Registered Investment Advisors (RIAs) who operate under the Investment Advisors Act of 1940 and under the supervision of the United States Securities and Exchange Commission (SEC). A large amount for opening a managed account is less a manifestation of elitism than a consequence of economic necessity. Portfolio managers face serious difficulties when trying to diversify funds less than $ 100,000 due to capital allocation issues and high transaction fees.

Personalization also means high levels of tax efficiency, a problem mutual fund managers often face. In contrast to mutual funds, in which capital gains / losses are passed on to all investors, an SMA investor is only taxed on realized gains in his specific portfolio. Because an SMA contains individual securities, capital gains can be offset through a method called Harvesting tax losses.

When it comes to the fee structure for managers, mutual funds benefit from greater transparency compared to SMAs. While most SMA manager fees are perfectly acceptable, their basic fee structure is outlined in a government filing called the Form ADV Part 2. In most cases, the fees depend on the size of the assets under management (AUM) and the percentage usually decreases as the assets increase.

However, if an investor does decide to invest in an SMA, they should be very careful when choosing a good investment advisor. Since the manager is then given the fiduciary authority to manage the account of a particular customer, both parties must ensure his “professional qualification” in order to avoid incorrect decisions. Since SMAs do not issue registered prospectuses, investors and / or their advisors must rely on other sources to investigate and evaluate the manager and act properly Due diligence. According to experts, collecting and approving all of the documents required to open SMA typically takes several days. In the end, the market situation can change significantly if the money really starts to “work”. This process is much faster with mutual funds.

However, experts note that investments in SMAs and mutual funds are not mutually exclusive. Mutual funds and SMAs can complement each other and act as part of a common investment solution for a client who doesn’t have to limit themselves to one difficult choice. In particular, if an investor buys these types of securities in order to achieve greater diversification in this class of assets, investing in a mutual fund can prove to be more profitable than SMA.

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