25.3.3 Separately Managed Accounts

Introduction to Separately Managed Accounts (SMA)

As investors’ assets grow, so do their choices in investment programs. Depending on their needs, clients can opt for an external portfolio manager to control the investments held directly in their individual accounts. Instead of being held in a mutual fund or a pooled account, assets are held separately, which is why these accounts are often called Separately Managed Accounts (SMAs).

Key Features of SMAs

External Portfolio Manager

With this type of account, the external portfolio manager (called the sub-advisor) controls the holdings based on a portfolio model. As the sub-advisor makes investment decisions, the actual securities are debited and credited to the client’s dedicated account within the firm.

Tailored Investments

Because the client holds the underlying securities, the portfolio models can exclude investments or sectors in which the client prefers not to invest. Each investor’s distinct tax situation can be taken into consideration as well. Despite managing hundreds of client accounts, sub-advisors offer personalized management.

Advantages of SMAs

• Access to Sophisticated Management: Clients get dedicated and sophisticated external portfolio managers.
• Tailored Reports: Performance reports are specific to the investor, showing the performance of each separate account, including when securities are purchased and sold.
• Direct Holdings: Clients directly interact with their investments, bypassing the pooled asset structure in mutual funds.

DID YOU KNOW?

Different investors have different views on the markets, with some wanting to hold and others wanting to sell. With SMAs, clients who want to hold avoid the risk of being forced to sell positions to meet the cash needs of other investors. Moreover, they avoid potential capital gain distributions for tax purposes.

Types of SMAs

SMAs can be either single-mandate or multi-mandate managed accounts (also called Unified Managed Accounts - UMA).

Single-Mandate SMAs

Single-mandate managed accounts are directed by a single portfolio manager or a team, focusing on sector-specific investments and optimal asset allocation. Clients can exclude certain securities for ethical, social, or other reasons, benefiting from personalized tax-loss selling.

Challenges:

• When multiple investment objectives are required, separate accounts are needed.
• Non-managed assets can’t be mixed within a single-mandate account.

Multi-Mandate Managed Accounts

In multi-mandate managed accounts, an overlay manager consolidates investments within a unified managed account, optimizing asset mix to mitigate risk while achieving investment objectives. It provides clients with broader product and service choices in one account and access to sophisticated institutional portfolio managers (sub-advisors).

Roles of the Overlay Manager

• Due Diligence: Continuously review the performance of sub-advisors.
• Asset Mix Optimization: Set optimal asset mix proportions to mitigate risk and maximize performance.
• Ongoing Monitoring: Oversee client investments and overall portfolio composition, occasionally rebalance it.
• Market Insights: Provide advisors with market insights and broader market perspectives.

DID YOU KNOW?

Professional oversight of multi-manager accounts gives high-net-worth clients greater confidence in their investment programs. Overlay managers do not work on referrals; they work in partnership with advisors, ensuring the clients’ investment aligns with their objectives.

Key Takeaways

• Personalization and Customization: SMAs offer a high degree of customization, suiting individual client needs, risk preferences, and tax situations.
• Expert Management: Clients have access to highly experienced portfolio managers and diverse investment strategies.
• Direct Holdings: Unlike pooled funds, clients hold individual securities directly.
• Transparency and Reporting: Aggregated and transparent performance reports.
• Flexibility in Investment Mandates: Clients can tailor their investment portfolios through single or multi-mandate strategies.

Glossary

• Separately Managed Accounts (SMAs): Investment accounts managed individually and separately from other clients’ accounts.
• Sub-Advisor: An external portfolio manager making investment decisions in an SMA.
• Overlay Manager: A key figure in multi-mandate accounts optimizing asset mixes and coordinating between different sub-advisors.
• Unified Managed Account (UMA): A type of multi-mandate managed account consolidating various investment strategies and managed by multiple sub-advisors.

FAQs

What is a Separately Managed Account (SMA)?

An SMA is an investment account tailored specifically to an individual investor, managed by an external portfolio manager who makes investment decisions based on a customized portfolio model.

How does a multi-mandate managed account differ from a single-mandate SMA?

A multi-mandate managed account, or UMA, consolidates multiple investment strategies within a single account and employs various sub-advisors coordinated by an overlay manager. In contrast, a single-mandate SMA focuses on one investment strategy under one manager.

What are the primary benefits of SMAs?

SMA benefits include personalized investment strategies, access to top-tier portfolio managers, tax-efficient structures, and detailed performance reporting tailored to individual investors.

Can I exclude certain sectors or stocks in my SMA?

Yes, clients can instruct the portfolio manager to exclude specific investments or sectors for ethical, social, or other personal preferences.

Conclusion

Separately Managed Accounts (SMAs) offer customized, client-focused investment solutions, enabling affluent investors to leverage professional management and personalized strategies. With options for both single and multi-mandate structures, SMAs provide flexibility, transparency, and a robust alternative to pooled fund investments.