Pros and Cons to a Seperately Managed Account
A Separately Managed Account (SMA) is a privately managed investment account owned by an investor seeking to manage a pool of individual assets. SMA's have been around since the 1970s, and a vast majority of the firms that offer SMA's are Registered Investment Advisor's (RIA). An SMA is commonly utilized by high net worth investors to provide an opportunity to invest in specific strategies like Socially Responsible Investing (SRI).
- Less Expensive: Morningstar research shows that the average cost of an actively managed portfolio is 0.75%* compared to 0.35 and 0.55% for Inspire Investments SMA's.
- Tax Efficiency:
- SMA's pass gains AND losses to the investor. Mutual funds cannot pass net tax losses. Passing on gains and losses allows the investor to intentionally tax harvest to tilt the tax effect towards gains or losses for the year.
- In an SMA, you are not impacted by the activity of other investors, who may generate capital gains due to the sale of their shares.
- Unlike a mutual fund, you are not subject to an entire year(s) worth of gains distributions even if you did not own the fund during the same period.
- Precise Rebalancing: Rebalancing can happen between individual securities.
- No Securities Overlap: If you own more than one mutual fund, they sometimes own some of the same securities. The tilt towards those securities might add unnecessary volatility and reduce diversity to the overall investment strategy.
- Cost Transparency: In an SMA, costs are visible on the statement. In a mutual fund, the fees are invisible because they are within the fund's expense ratio.
- Specific Strategies: Custom strategies can be used to target particular sectors, include or exclude individual securities, or constrain for social criteria.
- Lacks Conceptual Simplicity: With SMA's individual assets are owned by the investor. This can lead to unproductive conversations about specific stocks and their performance. It also increases the likelihood of extreme outliers, which wouldn't be visible in a mutual fund.
- Illiquid Asset Class Limitations: SMA's work best with securities that are easy to trade. They do not typically hold bonds or foreign securities. To work around this limitation and to add asset class diversity, a fund manager might add low-cost mutual funds or ETF's to the SMA portfolio.
- Small Accounts: An SMA might not be an option for smaller accounts. SMA minimums have come down from $5,000,000 in the early 2000s to now as low as $25,000, but are still too large for some investors.