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What is a Separately Managed Account and Should I Have One?

| July 18, 2018
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Separately Managed Accounts (SMA) have become increasingly accessible, providing institutional level investment opportunities for a greater number of investors, as technology and an increase in providers have lowered costs and account minimums. But before determining if SMAs are a good fit for you, the first obvious question is: what is an SMA?

An SMA is an account that is professionally managed for a single person or entity.  The individual or entity owns the investments in the account, unlike a pooled asset, like a mutual fund, where all the investors own a share of the pool of assets.

There are several advantages to an SMA. For one, because the client or trust owns the securities inside of the account, there is more control to harvest gains or losses for taxable accounts. SMAs also provide flexibility to exclude a position or certain types of positions that the client chooses not to own due to an existing concentrated position or socially conscious investing. Moreover, securities are not purchased for an account until funded or when funds are added, establishing a client's cost basis.

Another benefit of owning the securities in an account, there is no exposure to excessive flows into or out of a strategy. As a result, other investors’ behavior has no direct impact on the client's account. Further, all SMA fees, transactions and holdings are completely transparent.

You also have the option to group multiple SMAs into a single account, called a Unified Management Account (UMA). A UMA prevents the need for a single account for each SMA. Plus, there are typically lower minimums to enter a strategy in a UMA than an SMA.

When compared to mutual funds and ETFs, you’ll typically have a more concentrated portfolio with SMAs, and they can provide distinct advantages if they are a good fit. However, as they become more accessible to investors, it is important to note that SMAs are not the answer for all investors or for all asset classes. Certain situations may call for an ETF or mutual fund, and a diversified portfolio likely includes a combination of mutual funds, ETFs and SMAs.

We recommend that If you have not already done so, you and your advisor should take the time to determine if Separately Managed Accounts are right for your portfolio.

 

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