Insights

Separately Managed Accounts and Their Potential Benefits to Investors

Separately managed accounts (SMAs) may offer unique advantages compared with other investments because they provide the freedom and flexibility to tailor your portfolio to address your personal preferences — making your account “separate” and distinct from all others.

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Key Takeaways

  • A separately managed account (SMA) is a type of investment advisory account that can hold a diversified mix of stocks, bonds, cash and other individual securities, managed by a professional money manager.
  • Some of the most attractive features provided in a separately managed account include: direct ownership of securities, greater tax efficiency, portfolio customization, and an easy-to-understand fee structure.
  • SMAs were once limited to just institutions and ultra-high net worth investors. However, thanks to advances in technology, SMAs are becoming more widely available to a broader group of investors.
  • As financial advisors who work with high net worth investors, we believe SMAs provide key advantages over mutual funds or other pooled investment vehicles.

As your wealth grows, you may find that you seek more control, better transparency, and the ability to customize your portfolio to your goals, objectives, and values. While there are a number of ways to build a diversified portfolio - including individual stocks and bonds, mutual funds, and exchange-traded funds – separately managed accounts (SMAs) may offer unique advantages compared with other investment vehicles.

For many years, SMAs have been limited to just institutions and ultra-high net worth investors. For those investors who did not have access to a SMA, they may have been using less-optimal investment vehicles, like mutual funds. However, thanks to advances in technology, SMAs are becoming more widely available to a broader group of investors.

As financial advisors who work with high net worth investors, we believe SMAs are superior investment vehicles. As a part of our wealth planning approach, we generally recommend that investors consider the benefits of SMAs and how they can address your personal preferences, objectives, and risk tolerance.

What is a separately managed account?

A separately managed account is a type of investment advisory account that can hold a diversified mix of stocks, bonds, cash and other individual securities, managed by a professional money manager, which can potentially be tailored to meet specific investment objectives — such as tax efficiency and the exclusion of certain securities from your portfolio. In a SMA you own individual securities and have the freedom and flexibility to tailor the portfolio to address your personal preferences — making your account “separate” and distinct from all others.

How can an SMA work for you?

Some of the most attractive features provided in a separately managed account include:

  • Direct ownership of securities: You own the securities purchased for your account. Your money is not pooled with that of other investors, providing you with significantly more control and transparency than a mutual fund.
  • Greater tax efficiency: The cost basis for each security in your portfolio is established at the time of purchase, so you are not subject to gains earned by other shareholders as you might be in a mutual fund. This enables you to coordinate year-end tax management with your tax professional.
  • Customization of your portfolio: SMAs are built based on your personal investment goals, objectives, and values — allowing you to exclude specific companies or industries that do not align with your social, political, or environmental principles.
  • Easy-to-understand fee structure: SMAs typically charge a single fee based on assets under management rather than load fees, management fees, and operating expenses charged by mutual funds.



Comparing separately managed accounts versus mutual funds

 

Separately
managed accounts

Mutual fund

Ownership

Individual securities within the investment portfolio are owned by the investor.

Investor owns shares in a pool of securities.

Assets are co-mingled with those of other investors.

Tax efficiency

The cost basis of each security is established at time of purchase.


Potential for the investor and his/her money manager to manage taxation of gains and/or loses.

Cost basis may include embedded capital gains that came before the investor’s investment.

Tax management is under the sole control of the portfolio manager.

Personalization

Investor can request the exclusion of specific holdings from the portfolio, e.g., securities that do not align with the investor’s social, political, or governance principles.

Holdings are under the sole
control of the portfolio manager
— no flexibility for the individual investor.

Funding

Portfolios may be funded with existing securities and/or cash.

Shares in funds are purchased with cash.

Fees

Typically, a single fee based on assets under management.

Possible sales charges on
purchase or redemption (load
funds), in addition to ongoing
management fees and operating
expenses.

 


Accessing SMAs at The Edwards Group


Whether you are looking to maximize growth, generate retirement income, or pass your wealth efficiently to your heirs, SMAs can be utilized to achieve defined outcomes through thoughtfully crafted return and income objectives.

At the Edwards Group, our process-driven approach combines quantitative and qualitative methodologies to construct portfolios that aid easier implementation of tailored financial planning strategies to help you track more precisely toward your financial goals.

To learn more about or to get started, click the ‘Talk With Us’ button to schedule an initial consultation at no cost or commitment.

 


Fees for advisory programs include Advisory services, performance measurement, transaction costs, custody services and trading. Fees are based on the assets in the account and are assessed quarterly. These fees do not cover the fees and expenses of any underlying exchange traded funds, closed-end funds or mutual funds in the portfolio, which also carry inherent risks related to the product's underlying investments. There are minimum fees and account sizes to maintain these types of accounts. Advisory accounts are not designed for excessively traded or inactive accounts, and are not appropriate for all investors. During periods of lower trading activity, your costs might be lower if our compensation were based on commissions. We need to review your investment objectives, risk tolerance and liquidity needs before we introduce appropriate managers/investment programs to you. Please carefully review the Wells Fargo Advisors advisory disclosure document for a full description of our services, including fees and expenses.

Wells Fargo Advisors is not a legal or tax advisor. Be sure to consult your own tax advisor and investment professional before taking any action that may involve tax consequences.