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3 Considerations When Selecting an SMA


Separately managed accounts (SMAs) offer investors professional investment management and diversification. Here's what to consider when evaluating an SMA.

Separately managed accounts (SMAs) can offer investors professional investment management and diversification all in one place. Here are some things to consider when evaluating an SMA option.

1. The SMA Manager

When looking at an SMA option, it’s important to look at who will be managing your money and how they will be doing it. There are a number of aspects to review as part of your due diligence on the manager.

First, it’s crucial to understand who will be managing your money. Is there a single manager, or will there be a team of managers overseeing the SMA? You will also want to understand the investment background and experience of the manager, including their track record over time.

It’s important to not only gauge the manager’s experience in the investment space in general but also with the type of investing that will be done in the SMA you are considering. SMAs are generally more customized and personalized, and it’s important to understand if the manager has experience managing more customized portfolios.

You also want to be sure to understand the investing approach that will be employed by the managers in the SMA. Are they active managers who select specific stocks, bonds or other types of holdings for the SMA? Do they follow a more passive indexing style in the allocation for the SMA? Or is the SMA managed with a combination of active and passive strategies?

It’s also important to understand the manager’s investment style in terms of the types of securities and asset classes to be used. Is the SMA a single style account, focusing on large-cap stocks, fixed income or other specific asset classes or investment styles? Or is the SMA a multi-asset, multi-style account that is more comprehensive in its investment focus? Neither answer is right or wrong, but it’s important to understand how your money will be invested and if this manager’s style is in line with your needs.

SMA managers may be employed by the firm offering the SMA account, or the firm may use outside managers. Both can be good options, but you still need to do your own due diligence either way. In the case where outside managers are used, you should understand how the firm offering the SMA selects and evaluates these managers on an ongoing basis.

There is no one preferable answer to these questions, but the manager’s strategy should make sense to you. You don’t need to be an investing expert, but it’s never wise to invest your money in anything you don’t understand.

2. The Firm Offering the SMA

As with any type of investment, it’s important to know who the firm behind the account is. In the case of an SMA, this is very critical, as these accounts often involve investing strategies that are more tailored to the client, as opposed to a mutual fund or ETF that offers the same portfolio for all investors.

SMAs generally offer a number of advantages that mutual funds and ETFs can’t. These advantages typically include:

  • Portfolio customization. An SMA can often be constructed to meet the specific needs of a client. For example, if you hold a concentrated position in your company’s stock due to stock grants or other similar types of compensation, the SMA portfolio can be allocated in such a way as to offset this and offer a more balanced allocation. Perhaps you don’t want your money invested in stocks that represent certain product areas, like tobacco or industries that conflict with your religious beliefs and a customized SMA can help you avoid those.
  • Greater tax efficiency. Mutual funds throw off capital gains distributions at the same time for all investors. With an SMA, the manager has flexibility as to when they realize both capital gains and losses on portfolio holdings. This can be timed to the account holder’s advantage, including tax-loss harvesting if appropriate.
  • Portfolio transparency. Mutual funds report holdings at a certain point during the year only. SMAs provide regular statements with details about the securities held in the account and how those holdings are performing. This allows investors to see how the holdings are performing on a regular basis.

You and your financial advisor can work with the SMA managers to periodically review the portfolio to ensure that it is invested in a way that is geared to your needs and your changes.

In considering a firm for an SMA investment, you should look at the types of accounts available to you, as well as the level of personalization and customization offered. This, along with the quality of the managers and types of investment options offered, is key. While one approach might be the right one, for now, you want to be sure that the firm offers other SMA alternatives as your needs evolve over time.

3. Fees, Expenses, and Account Minimums

As with any type of investment, be sure to understand all fees and expenses associated with the SMA. Often, SMA fees are asset-based for the management of the account and may be billed quarterly. Fees are also sometimes billed in advance for the upcoming period or in arrears at the end of the quarter.

SMAs might have a minimum level of investment, so be sure to understand how this works. For example, you might initially meet the minimums, but your balance may fall below the account minimums at some point. Also, SMAs may have tiered minimums in terms of the options available to you and the fees associated with them.

Investors should understand how the SMA they are considering fits with other investments they might hold outside of the SMA, as well as how it fits into their investing and financial planning strategy. If positioned correctly, the right SMA can be a great addition to your overall wealth planning. Consult with your financial advisor to determine if an SMA is the right solution for you.

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