Everything You Need to Know About Separate Managed Accounts
What was once only a feasible option for the ultra-wealthy, Separate Managed Accounts (SMAs) have recently become an increasingly popular and accessible strategy for interested investors all over the country. Separate Managed Accounts or SMAs bring a number of significant advantages over their counterparts, managed funds and exchange-traded funds.
In order to provide insight into the benefits and drawbacks of this investment model, we’ve provided you with a comprehensive guide.
What is a Separately Managed Account?
An SMA is a portfolio of securities managed by a private investment firm, with portfolio managers and analysts taking responsibility for running the day-to-day decisions related to managing the account. This collection of assets is seen as favourable by investors because account holders retain all benefits from owning all assets listed in the investment portfolio.
Difference Between Managed Funds, ETFs, and Managed Accounts
Traditionally, investors have been drawn to exchange-traded funds (ETFs) and privately managed funds, both of which are available to the public. Like SMAs, these funds are managed and operated by private wealth managers but work on a larger scale, pooling the money of individual investors to increase the size of the fund. ETFs also provide the option for shares of the fund to be traded on the stock market.
While these funds are generally considered to perform to a high standard and provide a healthy Return On Investment (ROI), they are restrictive in offering a ‘one size fits all’ investment portfolio, in which investors are not always fairly rewarded for their contributions.
Benefits of an SMA
An SMA provides a number of benefits for investors including the following:
Complete Ownership
Opposed to the pool of collective assets shared in an ETF or managed fund, an SMA investor owns all assets within their fund, positioning them as the sole beneficiary with regards to the performance of their fund.
Flexibility and Greater Control of Asset Choices
SMA portfolios are responsive and flexible to your needs, with fund managers being granted the ability to customise assets within your fund to your preferred needs, goals and level of risk. A fund manager or adviser can quickly change your securities for others that are more relevant to your chosen investment strategy.
Tax Efficiency
Different legal circumstances apply to SMAs, meaning that all changes to your portfolio will have a direct influence to your individual circumstances as opposed to managed funds where the changes will impact the pooled investors. This means that your tax outcomes can be managed in a manner that better suits your needs and circumstances, saving you money and helping you grow more wealth over time by investing money that would have otherwise been paid in tax.
Greater Transparency
Considering all assets added to the fund are your own, it is easier to track your fund’s performance, with reports from fund managers being directly accountable to you, meaning you receive full disclosure. SMAs usually offer digital reporting systems that provide you with an easily accessible and comprehensive breakdown of underlying assets in your portfolio.
What Should I Look for in an SMA Provider?
Not every SMA provider can offer the same level of performance over time or guaranteed increases in value for your portfolio. Keen investors seeking the assistance of a portfolio manager should look for an individual or firm that has a significant level of experience, a history of delivering above-market performance and uses technology effectively to deliver value for their clients.
Considerations and Risks Before Investing in an SMA
There are a number of considerations and risks to take into account when opening and managing an SMA account. They are as follows:
- Income distributions are not guaranteed and may fluctuate over time
- SMAs may fluctuate significantly in capital value in the short term
- Account-holders may have to pay capital gains tax following the sale or redemption of assets within their SMA
- Re-invested income is considered as assessable income for tax purposes
- Account-holders may lose immediate access to their capital for a duration while invested
- SMAs (underlying assets) are designed for long term capital growth
If you’d like to receive advice on SMA management and or have any questions regarding self-managed accounts get in touch for more details.
