Script for video: SMA 101
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A separately managed account, also known as an SMA, is a professionally managed portfolio of individual securities.
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SMAs are unique to each investor, providing a wide range of capabilities to advisors and their clients. Regardless of your investment goals or values, SMAs provide greater voice over how a portfolio is constructed and managed.
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Separately managed accounts can provide investors with many of the benefits available through exchange-traded funds and mutual funds, including diversification and professional management. A key difference is what you own as the investor.
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With mutual funds or ETFs, investors own shares of the fund, not the individual securities inside of it.
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SMAs seek to provide similar investment exposure as mutual funds and ETFs, but instead of owning a share of the fund, an investor owns all of the securities inside of the account, putting them at the center of the portfolio.
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This unique ownership style introduces a high degree of flexibility and control in portfolios. There can be many benefits to using SMAs, but they are best defined by their inherent ability to provide personalization and tax-management.
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Let’s start with personalization. Because each client owns the securities in their account, every portfolio is unique and may be customized to their specific preferences.
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Clients portfolios can be personalized in a variety of ways. Fixed income investors can customize around duration, credit quality or state specificity, while equity investors can customize for factor tilts, sector exclusions or values-alignment. Regardless of the situation, SMAs empower investors to voice their priorities across the whole portfolio with added levels of transparency.
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Taxes remain one of the biggest challenges that investors face. For clients seeking to keep more of what they earn, individual security ownership through SMAs offer unique tax benefits, beginning when an investor funds an account and continuing on an ongoing basis.
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Funding the portfolio is typically the first step in the SMA journey. SMAs provide the flexibility to fund accounts with existing securities, allowing investors to shift portfolios to a new strategy….
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…without the tax cost of liquidating highly appreciated securities. Advisors can then work with their investment manager to fill out the portfolio in accordance with their clients’ objectives.
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Ownership of individual securities also allows for continuous tax-loss harvesting. Losses realized in an SMA flow through to the investor’s tax return. The realized losses offset realized gains, decreasing taxes paid at the end of the year.
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When it comes to SMAs, there is no one-size-fits-all strategy. Advisors should work with their clients to develop a plan tailored to their specific goals and objectives.
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SMAs are not suitable for every investor. Other investment vehicles may provide the same or similar benefits as separately managed accounts, possibly at a lower cost. Consult with your financial advisor to determine whether an SMA is right for you.
Disclosure language:
Investing involves risk, including possible loss of principal. Asset allocation and diversification may not protect against market risk, loss of principal or volatility of returns. Actual investment outcomes may vary. There is no guarantee that these investments strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. No representation is being made that any account, product or strategy will or is likely to achieve profits.
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Due to the complexity of tax law, not every single taxpayer will face the situations described herein exactly as calculated or stated; i.e., the examples and calculations are
intended to be representative of some but not all taxpayers. Since each investor’s situation may be different in terms of income tax, estate tax, and asset allocation, there
may be situations in which the recommendations would not apply. Please discuss any individual situation with tax and investment advisors first before proceeding.
Taxpayers paying lower tax rates than those assumed or without taxable income would earn smaller tax benefits from tax-advantaged indexing or even none at all compared to those described.
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