"Some investors don't even realize they exist." SMA is Wall Street jargon for a Separately Managed Account. Customized money management is a service that used to be reserved for institutions. Approximately three decades ago, very wealthy investors began to gain individual access to professional money managers who were willing to provide custom investment management services. Traditionally, the minimum original investment in a Separately Managed Account ranged from $1 million to $10 million, or more. The average investor who could not meet the minimum investment requirement was consigned to pooled accounts such as mutual funds and investment trusts. This hurdle to gain access to an SMA has been steadily lowered over the past dozen years to minimums as low as $25,000 to $100,000. Now that an SMA is within reach of a much wider group of investors, what is missing is education. A lot of investors do not understand the inherent advantages of an SMA, and many do not even know that they exist.
BENEFITS
Just like a custom tailored suit should fit better than clothes off the rack, a Separately Managed Account should help the investor meet his or her individual investment objectives with greater efficiency than the other choices available. Some of the benefits realized from a customized account with a professional manager are:
- Diversification versus Concentration -- The client can specify markets, sectors and individual securities to include or exclude.
- Tax Efficiency - Taxable gains or losses can be harvested to meet the client's specific needs.
- Full-time Professional Management - Complexity and extended trading hours in the global marketplace give the advantage to the professionals.
- Risk Management - The professional manager can engage in sophisticated risk management strategies (such as the use of derivatives, short selling, and options) that the typical individual is poorly equipped to execute.
- Personal Preference - The client can request that certain classes of investments (such as liquor or gambling) be avoided.
- Service - The professional manager should be willing to assist the client with advice, and be available to answer questions.
The development of new investment products, combined with access to professional managers, lays the foundation for the evolution and acceptance of the multi-strategy portfolio model that employs multi-directional trading. Within a few years, clients will be requesting that managers employ multi-directional trading strategies that can make money in down markets and flat markets, as well as up markets.
SAFETY FEATURES
Every investor needs to be concerned with not only the return on his money, but most importantly, the return of his money. Like any investment choice, before you turn over your money, investigate carefully the individual and firm that you are considering using to manage your money. Assuming you are dealing with a reputable money manager, a properly structured SMA has some excellent safety features. Unlike the typical fund or investment trust that tends to operate like a "black box" in which the transaction details remain a mystery to the investor, a Separately Managed Account should provide two important safeguards:
1) The professional money manager is given trading discretion which allows him to place trades, but your assets should be held by a separate, unrelated custodian. The money manager should have no authority to remove assets from your account, and the custodian (usually a major brokerage firm) should have SIPC insurance and additional private insurance.
2) By definition, your account is separate, and your assets should not be commingled with anyone else's assets. With today's technology, you should be able to view your account in real time 24 hours a day from anywhere in the world where you can obtain internet access. Being able to monitor every event in your account in real time is an excellent safeguard against anything occurring that is not in compliance with the investment instructions that you have provided to your manager.
HIRING A MANAGER
Most money managers are typically introduced to investors (their clients) through an intermediary. The New York wirehouse firms control an estimated 70% share of the market. But this is only because they were the first to aggressively market SMAs by "wrapping" them into their menu of services. Thanks to the internet, and an increasing awareness among financial planners, banks, and insurance companies, it is now easier to find and access the managers of Separately Managed Accounts. In addition to performance, the biggest issue for most investors should be controlling the fees that they are charged. While an intermediary can provide a valuable service helping to introduce you to money managers and find an appropriate fit, they need to be paid, and this involves an additional fee. In some cases you are really just being placed into a "fund of funds" in disguise. If you are placed with a giant money manager, you are at risk of being pooled with his other investors in a way that is little different than being in a mutual fund. The fees on these "wrap accounts" can run up to 3% of assets, and sometimes higher. It is hard to realize good portfolio performance if the manager's performance is clipped by 3% right off the top.
Often, going direct to the money manager without an intermediary can save a substantial amount in fees. Many money managers work for management fees that are very competitive with (and often less than) the fees that mutual funds charge. Your objective is to get better service, better performance, and the advantages of a custom account, for the most competitive fees possible. The magic of a Separately Managed Account is that you can have it all. You can get professional management, superior performance, and service. For most people, this is much more rewarding than trying to do it yourself.
To learn more, click on FAQ (frequently asked questions) on previous page.