Separately Managed Accounts

Here is a brief history, introduction, and commentary regarding Separately Managed Accounts. Enjoy.

The financial services industry has traveled a long way. With volatile markets and lots of investment choices, both advisors and investors want to know now more than ever, what is the most effective tool for growing investment capital?

There is no one solution suitable for every individual. One thing is for sure; today’s investor has access to some truly advanced asset management vehicles. Looking back in history helps us to gain perspective on the available tools and strategies used to manage private client and institutional assets in the modern era.

The first pooled account arrangement hit the U.S. in 1893. It originated at Harvard University 15 years before the first production Model T. Europe already had pooled investment vehicles in the 1850s. The first public fund was born in this country in 1924. It came from Massachusetts Investors Trust. By the late 60s there were 270 funds holding approximately 48 billion in assets. Today we have over 10,000 funds holding over 7 trillion in assets for over 86 million investors.

Today, the proliferation of new products, fee arrangements, and marketing budgets leave many investors unsure where to place their investment capital. Today perhaps the most popular and modern tool is the Separately Managed Account (SMA).

SMAs have always been available to institutions and super wealthy individuals. Beginning in 1979 these account arrangements became more accessible to the private client world. They are now one of the fastest growing segments in the financial services industry.

SMAs are private account arrangements managed by third party money managers. They might look and feel like traditional pooled account vehicles, but because the assets are not commingled with other investor’s funds, they can offer the client more effective tax and fee management.

Throughout history, SMA portfolios have been an essential tool for pension funds, foundations, and endowments. Up until recently, high account minimums have kept most investors dependent on mutual funds for structured portfolio access. Here is the good news; I have seen some investment counsel firms offering as low as $25,000 account minimums.

Understand the tool

As with any specialized tool, it should be used in the most prudent way by a trained expert. It is essential for advisors to have a solid understanding of the SMA manager’s role and how they are impacting the client’s overall portfolio. I will cover portfolio performance and risk metrics another time.

Not all SMA account relationships are consultative

Consultants are independent. They have no internal product to sell. Big Wall Street firms, banks, insurance companies, and other financial service firms are using SMA account platforms as a captive forum to sell their own internal products or give special access to managers who conduct trading business with the firm. Independent third party SMA firms can offer clients an authentic advisory relationship. Direct access to boutique asset management firms are also an excellent option.

Catch the wave

Large powerhouse financial services firms are constantly at the drawing board trying to position their products to catch the next wave in the private client market. SMA portfolios can give clients tremendous value in reducing fees, eliminating dilution, and managing capital gains. The SMA wave is already breaking on our shores and they can give individuals the same ultimate ride institutions have been experiencing for years. Enjoy your endless summer!

Regards,

Ryan