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What Are SMA’s And How Can They Benefit Your Firm?

By Kleber Oliveira on

In today’s fast-paced and forever evolving economy, it’s becoming increasingly apparent that financial advisors need to broaden their offerings to drive client acquisition. One way to do this is through separately managed accounts (SMAs).

These types of accounts can be the sweet spot for clients who are somewhere between middle and high net worths. In this sweet spot, you can find a number of wealthy investors waiting to find the perfect advisory partnership. These are the clients that can bring in great success for your firm.

For the advisor who is looking to cater to the HNW audience, separately managed accounts could be the answer. In this article, we will explain SMAs in detail and determine the key benefits that they can bring to your firm.

What is a Separately Managed Account?

An SMA can be defined as a privately managed investment account that has been opened through a brokerage or financial advisor. In these accounts, pooled money is used to buy individual assets. As this portfolio is private, the assets it contains are not commingled with other investors – hence separately managed.

Investments that typically fall under these accounts are:

  • Stocks
  • Bonds
  • Individual securities
  • Cash

A large part of a SMA is the fact that the separation status enables the manager to customize the portfolio to the investor’s goals and preferences. This means financial advisors are able to deliver a more tailored investment experience. The investor will then have ownership of the securities in the account, and the fees will thereby be negotiated with the account manager. All-in-all, a plan that can accomplish a unique set of goals is one of the main drawcards that appeal to HNW clients and investors.

Another way of looking at SMAs is by contrasting it with mutual funds. A mutual fund is made up of various types of securities that are maintained by a portfolio manager. The investor doesn’t own any shares in the fund but rather the mutual fund itself. In other words, when you invest in a mutual fund, the assets are combined with those of other investors in the same fund. SMAs allow for full ownership of the invested assets.

SMAs in Finance

The Benefits of SMAs:

Unlike other investments, SMAs offer a firm degree of control which many investors can benefit from. This is possible because of the stock and bond ownership that underpins the portfolio, as opposed to the commingled investments that are found in a mutual fund. As an advisor, tailoring an investment to your client’s goals and personal limitations can easily be achieved through SMAs. In turn, this will have a positive impact on your client’s experience.

Furthermore, SMAs offer a number of other benefits. These include greater transparency in terms of their holdings and fees, as well as the tax efficiencies they provide. Both your firm and your clients can expect to benefit from SMAs in the following ways.

Customization

As we’ve already mentioned, tailoring an investment program can be possible through SMAs. Here you can select a money manager with an investment approach that closely aligns with the client’s objectives and/or risk tolerances. Instead of researching investments for a commission, the focus is on formulating goals, tracking the performance, and creating a comprehensive financial strategy. Your client will, therefore, be assured that their money is in the right hands and in the most advantageous position.

Tax Efficiency

Investing in mutual funds means that capital gains tax is a shared liability for all investors in the fund. However, with SMAs, only the personal portfolio’s realized gains can be taxed. The capital gains tax can also be offset by selling investments. This is what we call tax-loss harvesting and it’s possible to do so thanks to the individual securities that make up the SMA. With fewer tax limitations, your clients may be willing to invest more and therefore bring in greater revenue for your firm.

Fee Structure

Typically, mutual fund fees include the management fee, sales charges, and special expenses. With SMAs, fees are determined between the asset manager and the individual investor. Therefore, it is negotiable to suit your client and your firm. There is also the option to implement an incentivized scale.

SMA Benefits

SMAs and High Net Worth Clients

Arguably the biggest benefit for your firm is that SMAs attract high net worth clients. These types of clients require a more hands-on approach with detailed investment plans compared to the average investor. Enter SMAs.

Having a targeted investment plan can attract HNW clients due to its ability to address their unique set of needs. In an SMA program, you are able to cater to these mentalities while giving your client greater control over their investment. As a result, confidence will build and the chances of your firm taking over their larger accounts will improve.

How to Integrate SMAs into Your Firm

There are 2 options when it comes to working with SMAs: utilizing third-party money managers or your investment platform. For optimal performance, it’s best to vet and monitor each program before finalizing your strategy. There will be a possibility for small errors that should be taken into consideration.

Once the initial navigation phase is over, you should think about how the chosen program will fit into your firm on the whole. Here you will need to consider your service environment, and how you will deliver your SMA offering to your clients. In addition to this, your SMA program will have to be made visible. Highlighting the benefits you will be able to deliver to HNW investors is key.

These benefits include, but are not limited to:

  • Investment transparency and control
  • Reduced tax burden
  • Investment flexibility

SMA Benefits in Investing

Final Thoughts

Attracting high net worth individuals should be at the forefront of your firm’s client acquisition. These clients will bring in large investments and revenue for your firm to thrive off of. In order to appeal to these types of clients, SMAs can’t be done without it.

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