Separately Managed Accounts (SMAs) Intro

Separately Managed Accounts (SMAs) have significantly evolved since their inception in the 1970s and are now utilized by a majority of asset managers.

Originally designed for ultra-high-net-worth individuals due to their high minimum investment thresholds, often exceeding $100,000, SMAs have recently become more accessible to a broader range of investors with lower amounts of available investment capital.

The main driver behind the increased accessibility of Separately Managed Accounts (SMAs) has been the digital transformation across the financial industry. Advances in software solutions and platforms have simplified operations for asset managers, significantly reducing costs. This, in turn, has made SMAs available to a broader spectrum of investors, expanding their appeal beyond just the ultra-wealthy.

Although the costs associated with Separately Managed Accounts (SMAs) have decreased, they are generally still higher than those of other investment products. To attract investors, SMAs must therefore offer additional benefits. These include enhanced customization, direct ownership of securities, and more precise tax management opportunities. These advantages can justify the higher costs, providing significant value for investors who seek a tailored investment strategy and greater control over their financial portfolios

The increased investor interest in Separately Managed Accounts (SMAs) provides a new incentive for asset managers who have not yet considered offering SMAs, or for those looking to expand their presence in this market.

If you're considering launching or expanding your SMA offering, our software solution can serve as the cornerstone upon which you can build your business. With our platform, you can improve your portfolio management processes, improve operational efficiency, ensure compliance with regulations, and deliver comprehensive and insightful client reporting.

Separately Managed Accounts (SMAs) Key Takeaways

A Separately Managed Account (SMA) is a private portfolio of assets—such as stocks, bonds, cash, and other securities—managed by a professional investment firm or a financial advisor. This type of investment account is customized for the individual investor, offering a direct ownership of the securities in the portfolio, unlike mutual funds where investors own shares of a collective investment.

Separately Managed Accounts (SMAs) are becoming more accessible and appealing to affluent retail investors who have substantial but not necessarily ultra-high capital to invest, typically in the range of six figures. This trend is driven mainly by technological improvements in portfolio management and trading platforms that have made it easier for investment firms to manage SMAs on a large scale.

SMAs provide greater customization in terms of investment strategy, approach, and management style compared to mutual funds. Investors can set specific guidelines for their SMAs, such as restrictions on trading certain stocks or sectors due to personal values or risk considerations.

Separately Managed Accounts (SMAs) offer several benefits over mutual funds, particularly in terms of direct ownership of securities and tax advantages. In an SMA, you directly own the individual securities (stocks, bonds, etc.) rather than owning shares of a mutual fund that in turn owns the securities. SMAs can offer significant tax benefits compared to mutual funds. Since you own individual securities, you can manage tax implications more effectively.

What Is a Separately Managed Account?

A Separately Managed Account (SMA) is a personalized investment vehicle managed by professional money managers and offered by financial consultants and brokerage firms. SMAs consist of individual securities like stocks, bonds, and cash. Unlike mutual funds or ETFs where investments are pooled, SMAs allow direct ownership of securities, offering a range of benefits including customization according to the client’s specific investment goals, risk tolerance, and tax preferences. The flexibility of SMAs allows for tailored portfolio management focused on various investment styles, tax efficiency, and environmental, social, and governance (ESG) objectives.

SMAs are also known as "individually managed accounts" or "separate accounts."

The widespread popularity of Separately Managed Accounts (SMAs) may seem like a recent phenomenon, but they have been experiencing steady growth since 1974. That year, E.F. Hutton (E.F. Hutton Suggests) introduced "consulting services accounts" to retail customers, pioneering the concept.

According to information from broadridge.com, a significant number of financial advisors are now incorporating Separately Managed Accounts (SMAs) into their offerings, with 62% of them using SMAs.

Key features and benefits of Separately Managed Account

Separately Managed Accounts (SMAs) offer numerous benefits that cater to the specific needs of individual investors. One of the primary advantages is the ability to customize the investment portfolio to align with personal investment goals, risk tolerances, and tax situations, allowing for a highly personalized approach to asset management. SMAs also provide direct ownership of securities, which can lead to more transparent and efficient tax management, as well as the potential for lower transaction costs compared to pooled investments like mutual funds or ETFs. Additionally, SMAs often offer enhanced portfolio transparency and more frequent communication with money managers, which can lead to a better understanding of how portfolio decisions align with the investor's financial objectives. This direct relationship with managers and tailored strategy execution make SMAs particularly attractive for investors looking for a sophisticated, client-centric investment solution.

‍Direct Ownership: Investors in an SMA have direct ownership of the individual securities in their account. This contrasts with mutual funds, where investors own shares in the fund itself, not the underlying assets. Direct ownership provides investors with greater control over their investments, including specific tax management strategies, such as tax-loss harvesting, and the ability to tailor the holdings to meet personal preferences or ethical standards. This aspect of SMAs can be particularly appealing to investors seeking a personalized investment approach and more direct oversight of their assets.

‍In Specie Transfers: Clients have the ability to transfer existing direct equity holdings into their SMA portfolio without having to liquidate these positions. This means they can move their investments into the SMA and continue to retain beneficial ownership of the securities. Such transfers help in avoiding potential capital gains taxes that would result from selling the assets before transferring them. It also allows clients to seamlessly integrate their pre-existing investment strategies and holdings into the SMA, maintaining continuity and alignment with their long-term financial goals. This feature is particularly advantageous for clients looking to consolidate their investments under a managed service without disrupting their current investment positions.

‍Customization and Personalization: SMAs allow investors to tailor their portfolios to align with specific investment goals, risk tolerances, time horizons, and personal values such as ethical or social considerations. This customization extends to the finer details of the portfolio management process, enabling clients to impose restrictions on certain types of investments, like avoiding alcohol or tobacco companies, or focusing on environmentally responsible firms.

‍Tax management: The direct ownership of individual securities in Separately Managed Accounts (SMAs) enables their tax management capabilities, making them especially attractive to investors who aim to maximize their after-tax returns.

SMAs facilitate the practice of tax-loss harvesting, where investors sell securities at a loss to offset capital gains tax liabilities on other investments. This strategy can be implemented efficiently in SMAs because the investor has control over individual securities rather than collective fund shares.

The direct ownership model of SMAs also aids in minimizing capital gains taxes. Investors can manage the timing of buys and sells more strategically to take advantage of long-term capital gains tax rates, which, depending on the country,  are typically lower than short-term rates.

SMAs can provide the flexibility to tailor investment strategies to individual tax circumstances. Whether it’s aligning investment strategies with fiscal year-end considerations, managing charitable contributions through appreciated stocks, or planning for estate taxes, SMAs offer a personalized approach to integrating investment decisions with broader financial planning objectives.

‍Transparency and control: Separately Managed Accounts provide significantly greater transparency and control for investors. In a managed account, the investor retains the ability to directly influence trading decisions, access real-time trading records via the brokerage firm, and liquidate portions of the account whenever they choose. Additionally, investors have the freedom to change or dismiss their money manager at their discretion.

Separately Managed Accounts vs funds

Deciding whether to form a fund or trade through separately managed accounts (SMAs) is a critical choice for a prospective money manager, as it can substantially influence various aspects of their business.

A prospective money manager needs to choose between setting up a fund or managing individual accounts, based on their preferred trading strategy, be it in securities, futures, forex, or other alternative trading products. Each choice has a distinct structural and operational framework. A fund typically pools investments from multiple investors into a single entity, often structured as a limited partnership. In this setup, investors are limited partners, and the money manager acts as the general partner, possibly through a separate management company that advises the fund. The money manager earns through management and incentive fees derived from managing the fund's assets.

On the other hand, with managed accounts, the money manager handles the investments of individual investors without pooling assets. Each investor establishes their own trading account with a third-party brokerage firm. The money manager is granted discretionary authority to trade the account but cannot withdraw funds for fees. Instead, a trading agreement with the brokerage authorizes the manager to trade and receive payments. While the manager may apply a uniform trading strategy across multiple managed accounts, they also have the flexibility to tailor strategies to individual accounts as needed. This structure offers a direct and personalized management approach but lacks the collective investment advantage of a fund.

Legal considerations (please get legal advice from a lawyer):‍

There are significant legal considerations to take into account when choosing between trading a fund or managed accounts. These considerations vary depending on the type of financial products involved, such as securities, futures, forex, or other alternative trading products.

For money managers planning to trade securities for a fund, registration with the state where business operations will occur or with the U.S. Securities and Exchange Commission (SEC) is required, depending on the manager's assets under management (AUM). If trading futures or forex for a fund, the manager must register as a commodity pool operator (CPO) with the Commodity Futures Trading Commission (CFTC) and join the National Futures Association (NFA).

Similarly, money managers who handle securities for managed accounts must register with the state or the SEC, based on their AUM. Those trading futures or forex through managed accounts need to register as a commodity trading advisor (CTA) with the CFTC and also become a member of the NFA.

A fund typically raises investment capital through a private placement under Regulation D ("Reg D"), which limits ownership offers to no more than 35 unaccredited investors, with the remainder needing to meet the accredited investor standard—generally individuals or entities with a high net worth. Finding and attracting these accredited investors can be challenging. Additionally, if a fund opts to utilize the Reg D provision for general solicitations, all investors must be accredited, allowing the fund to publicly solicit investments through the internet and other media.

Conversely, managed accounts provide more flexibility in investor qualifications. Money managers can trade accounts for investors of any net worth without the private placement restrictions on solicitation methods, making it generally easier to attract investors.

However, since the funds available in managed accounts are generally smaller, some specific trading strategies may not be feasible due to insufficient capital.

Transparency and control:

A fund typically offers less transparency, as investors must rely entirely on the money manager for decision-making regarding the trading of the fund's assets. Investors in a fund receive performance reports periodically and must adhere to the information provided in the fund's subscription and disclosure documents. They have no direct control over investment decisions and are subject to restrictions on when and how they can withdraw their funds.

In contrast, separately managed accounts provide significantly greater transparency and control for investors. In a managed account, the investor retains the ability to directly influence trading decisions, access real-time trading records via the brokerage firm, and liquidate portions of the account whenever they choose. Additionally, investors have the freedom to change or dismiss their money manager at their discretion.

How can vestr help your Separately Managed Accounts (SMAs) business

Our white label Software-as-a-Service solution enables you to manage all your actively managed products and has all the features and functionalities you would expect from a modern SMAs software solution.

Our rebalancing tool for Separately Managed Accounts (SMAs) simplifies the process of adjusting investment portfolios with straightforward functionality. It allows portfolio managers to efficiently reallocate assets, ensuring that the portfolio remains aligned with the desired investment strategy. Users can easily import target portfolios, set up reinvestment rules, and adjust weight allocations as needed.

Our platform offers sophisticated order management capabilities, providing real-time monitoring of trade execution for your investment products. With the flexibility to modify or cancel orders at any time, you maintain complete control over the execution of your investment strategy. Our system tracks every partial execution and applied order commission, ensuring transparency and enabling informed decision-making to optimize your investment approach.

Our platform offers user-based customization of reports, allowing users to create and store fully tailored report templates. These templates can be shared across organizations and subscribed to based on preferred languages and frequency. Users have complete control over customization, from logos to chart colors, displayed figures, columns, and more. They can even define custom data fields and incorporate them into their reports, ensuring flexibility and precision in reporting.

Our platform offers automated compliance checks through a sophisticated investment rules framework. Users benefit from both pre- and post-trade checks, with constant monitoring of active and passive breaches that trigger instant notifications. Issuers and administrators have the flexibility to set investment rules per product, defining constraints on countries, sectors, asset classes, or liquidity. These constraints can be configured as "allow lists" or "block lists", or specify minimum or maximum thresholds for the number of titles or relative weights. This robust system ensures adherence to regulatory requirements and investment guidelines, enhancing transparency and risk management.

Our fee calculator provides real-time calculation for various fee structures and types, including management fees, performance fees, transaction fees, setup fees, subscription fees, custody fees, and more. Users can define fees for issuers, asset managers, custodians, or any other beneficiaries. Advanced features such as minimum fees per period, tiered fee structures, and fee resets are supported, offering flexibility and accuracy in fee management. With our platform, users can efficiently model and adjust fee structures to align with their business needs and objectives.

Our platform maintains a compliant audit trail of all lifecycle events, meticulously tracking every step from corporate actions to secondary market trades, FX hedges, interest accruals, and payouts. With detailed records for each product, our software offers full transparency, allowing users to trace the evolution of products over time. This comprehensive activity log ensures regulatory compliance and enables informed decision-making by providing insights into the history and progression of each investment product.

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