Unwrapping SMAs

A separately managed account makes professional money management available to the smaller investor. Not very long ago, it seemed that all anyone needed to become an investor was a modem and a point of view. When the stock market was reaching all time highs, valuations were at levels never seen before, and stock prices kept climbing on a seemingly unstoppable upward trend, making money as an investor didn’t seem so hard. Alas, all good things must come to an end, and as trends reversed, and valuations were recalibrated, investors realised that it wasn’t such an easy game after all. It is clear that investors are abandoning the self-directed approach to investing, as evidenced in the US by the decline of 39 per cent in the total volume of online trades to 50.6m by mid-2001, from a high of 82.3m in mid-2001, according to Cerulli Associates. However, although many investors have been rudely awakened to the fact that investing is not as easy as it looks, and are so less comfortable managing their own money, they have also realised that what is needed is a more disciplined approach to wealth management. It is this realisation that has led, particularly in the US, to the rise of the separately managed account (SMA) or “wrap” account, as investors turn more and more to customised professional money management. Until recently, professional portfolio management was reserved only for institutional investors and the super-wealthy. The SMA typically provides individuals with a minimum of E100,000 to invest, with access to the investment expertise that manages the wealth of Fortune 500 CEOs and endowment and foundation boards in the US, and which was previously out of reach. Professional A separately managed account (SMA) is a professionally managed private portfolio of stocks and bonds owned by the investor, which is actively managed and guided by a professional investment manager. The key difference between, for example a mutual fund, and an SMA is that an SMA offers investors a process-oriented approach to investing, rather than a generic product. Usually, the process begins with an assessment by an adviser of the individual’s financial needs and goals. The adviser can then recommend a variety of portfolio strategy options, which are customised to meet each investor’s needs. Once the strategy has been agreed, a professional portfolio manager buys and sells stocks and bonds in the portfolio on the investor’s behalf. The financial adviser then keeps a close eye on the portfolio’s performance. Service In a nutshell, therefore, the SMA service is an ongoing process that enables the investor to monitor the health of their portfolio and adjust it accordingly, all with the guidance of a financial adviser. This brings to the individual investor the type of service that has been available previously only to institutions and wealthy individuals. It is now recognised that investors have different and changing requirements at various stages of their life. Because the stocks and bonds in the portfolio are managed, and monitored, by investment specialists, an SMA enables the investor to build a long-term portfolio that can be customised over time to match their different life-stage needs. In general, SMAs have a number of distinct features, which differentiate them from traditional investment accounts. As the portfolio is tailored to meet both long- and short-term cash needs, an SMA, unlike for example, a mutual fund, can take into account personal investment preferences, such as not investing in particular stocks for personal, social or environmental reasons. Ownership Also unlike mutual funds, the investor has direct ownership of the stocks and bonds within the portfolio. This can facilitate tax management strategies. SMAs are therefore bringing to individual investors a level of account management and investment expertise that has previously been out of reach. The early US experience would tend to suggest the SMA should be considered as the “next generation” of investments for the individual investor. However, replicating this experience in Europe will be a considerable challenge. For example, differing tax regimes will make some of the tax benefits seen in the US harder to implement. Be that as it may, it seems likely that the SMA, with the enhanced benefits for investors, is here to stay.

Top attractions

• Fee structure One of the biggest attractions of SMAs is supposedly the fee structure, according to their providers, US companies such as State Street, Morgan Stanley, SEI and Raymond James. SMAs are highly transparent, with no hidden fees. As the fee is a pre-negotiated percentage of your portfolio balance, so the portfolio manager’s and and the investors incentives are directly aligned. The fee is generally incurred quarterly, and as it is a fixed percentage, investors do not incur transaction costs from the regular sale and purchase of stocks and bonds in the account.
• Built-in comprehensive reporting structure As the financial adviser is monitoring a portfolio on a regular basis, an investor can be updated quickly on any important developments. Investors also receive a detailed quarterly report of their account balance, asset allocation, and all the activities in the account during the period.