NAIFA's Advisor Today Keyword(s)

 E-mail   Print  Share

Separately Managed Accounts

Use them to manage your client’s portfolio and offer more diversification.

By Dan Maurer

Separately managed accounts are becoming more popular with investors, especially in light of the increased demand for securities holdings transparency and broader investment-customization options. According to the Money Management Institute, SMA assets reached approximately $620 billion at the end of June 2005, a 40 percent increase from 2003 levels. SMAs, which have typically been reserved for the wealthiest clients who can afford to meet the substantial account minimums, have evolved into a product that is available and increasingly relevant to a wider group of people.

The key point is that one investor’s account is distinct from all others.

But in spite of their growth, SMAs remain a distant competitor to mutual funds in terms of awareness, assets under management and advisor acceptance. Do investors understand the advantages of SMAs? And what should be done to expedite their growth? The answers to these questions are directly related to advisor awareness, product positioning and investor education.

SMAs defined
Like many products in the financial-services industry, SMAs suffer from a lack of understanding among investors and financial advisors. Simply put, an SMA is an investment portfolio of stocks, bonds, cash and other individual securities, managed by a professional, institutional-quality money manager. Unlike a mutual fund investor who owns an individual interest in shares of an entire fund, an SMA investor directly owns the securities held in his SMA.

Although SMAs can be constructed using different investment styles or strategies, investors can further personalize their separate account portfolios to exclude certain securities categories according to their existing holdings and investment preferences. For example, they can exclude alcohol or tobacco stocks if they wish. SMAs also allow for additional customization through the selection of certain tax-management and rebalancing preferences. The key point is that one investor’s account is distinct from all others, and his assets are not connected or combined with anyone else’s.

Think of it this way: When you are in your favorite coffee shop, listen to the orders placed while you are in line. You can witness hundreds of different variations of a cup of coffee, as consumers demand the variation that suits their personal taste. If you want a “half caf, double latte with skim milk, sugar and a cinnamon stick,” that’s exactly what you can order. On the other hand, when you walk into a gas station to grab a cup of coffee, odds are you’re going to get two choices: decaf or regular. SMAs present the same value proposition to investors as your favorite coffee shop.

The rebalancing, tax control, tax-harvesting, sector/security exclusion and asset-class inclusion/exclusion capabilities of SMAs allow the investor to take advantage of a portfolio specifically designed to meet his unique investing “tastes.”

What’s holding back SMAs?
In spite of these advantages, certain factors may be preventing SMAs from becoming as popular as mutual funds. At the most basic level, SMAs have the reputation for being complicated niche products for the very wealthy, while mutual funds are practically “brand name” investment products.

It’s fair to say that some amount of education needs to take place before a product can reach the tipping point and cross the critical mass threshold. SMAs are no different, and in fact, even those investors who currently have SMAs do not always recognize or take full advantage of the features they can offer.

According to a recent Citigroup Asset Management study that examined investor and advisor perceptions of SMAs, nearly 60 percent of survey respondents have not asked their financial advisors to utilize the tax-harvesting capabilities inherent in SMAs. Ultimately, this feature allows investors to overlay their taxable preferences with the activity of the money manager within their portfolio.

Furthermore, there are no embedded tax gains when an investor initiates or adds money to an SMA, as opposed to the potential for embedded gains when buying into a mutual fund. In other words, with mutual funds, the client may have to pay taxes on the results that occurred before he entered the investment vehicle. With SMAs, on the other hand, an investor’s “day one” is the taxable “day one.” Perhaps more importantly, the Citigroup survey also showed that barely more than half of the respondents have asked their advisors to exclude certain stocks or asset classes from their holdings.

Let’s say you work for an insurance company and have been compensated in company stock as your annual bonus for the past 15 years. When you think about additional investments, it makes sense to recognize that you’re probably adequately exposed to the insurance sector, and you might benefit by excluding insurance-focused holdings and diversifying your portfolio. It’s simple common sense, yet investors haven’t been taking advantage of the power of the exclusion feature.

With all of the SMA advantages, why aren’t more advisors recommending them to their clients and prospects? According to the Citigroup survey, advisors say that investors don’t look at SMAs with the same degree of understanding as they view mutual funds. And since the advisor is the intermediary between the investor and the SMA platform, it’s no wonder that he recommends a product that’s common parlance to his client.

Education is key
It’s clear that education is needed for the SMA sector to continue to grow. The advisor must understand the SMA platform thoroughly so he can recommend it to his clients, but the client needs a basic understanding of SMAs before he is going to commit a substantial amount of assets into SMAs. As such, advisors and SMA providers must focus their efforts on educating the broad investing community.

When communicating to clients, advisors and their SMA providers must demonstrate the flexibility, transparency and tax-harvesting benefits that SMAs provide when compared to mutual funds. A clear explanation of these features can help combat issues pertaining to investor understanding. After all, it is the obligation of an advisor to offer a client the product that maximizes his potential to reach his individual financial goals.

Without question, there has been an explosion of new investment vehicles over the past several years, which presents new practice management, compliance and client-education challenges for advisors. With more options, however, comes more opportunity to customize a client’s portfolio and provide broader diversification. And with SMAs representing the next phase of customized investing, advisors can benefit from exploring the opportunities inherent in separately managed accounts on behalf of their clients.

Dan Maurer is senior vice president of marketing for Curian Capital, LLC. You may reach him at


Related Articles

Building a Referral-Based Practice

Separately Managed Accounts

The Hardest Sale

Starting the Buy/Sell Conversation

The Barely Boomers

What to Take to a Meeting

Safety First: Internet Security

See other articles about Financial Planning

Conference Newsletter

Contact Us   |   Reprint Permission   |   Advertise   |   Legal Notices   |   Join NAIFA   |   Copyright © Advisor Today 1999-2017. All rights reserved.

AT Blog
Product Resource
Digital Magazine