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March 9th, 2016

Intrigued by Separately Managed Accounts (SMAs)?

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Atlanta, GA asks…I’m intrigued by separately managed accounts (SMA’s)…can you tell me more about them?

Thanks for asking Atlanta…most overviews of separately managed accounts usually include “compare and contrast” notes relative to mutual funds.  Here’s the run-down for you…

It’s all about customization. That’s perhaps the most distinct advantage an investor will get from a separately managed account (SMA) versus a mutual fund. Below, we’ll talk about some of the benefits of SMAs, but not in an effort to crown them superior to mutual funds. Both approaches can offer a path to diversification which just about every investor needs. But, SMAs are better suited for investors with a higher level of liquid assets, say $250,000 or higher. Here’s why.

Get Advice but Don’t Lose Control

Unlike mutual funds, where an investor must choose among buckets of pre-specified sets of securities, SMAs enable you to construct a portfolio based on your specific goals and preferences which are unique to every single person..

For example, this is particularly helpful if an investor has a strong aversion to certain securities. A business owner may want to avoid, on ethical or legal grounds, holding a rival company’s shares in their personal portfolio no matter how financially beneficial it is for them. With SMAs, investors have a say in selection of individual equities as opposed to mutual funds.

Also, greater customization supports avoidance of the pitfalls associated with rigid asset categorization. For example, a Large Cap Growth mutual fund and a Technology mutual fund are likely to have overlapping stock positions with companies that fit both categories like Google, Microsoft, and Apple Inc. An investor can control overlap (a risk control tactic) in a separately managed account.

Tax Advantages and Transparency           

SMAs also support more effective tax loss harvesting, or strategically off-setting potential capital gains on a stock by selling other securities at a loss. That’s unlike mutual funds, where the option of tax burden reduction is limited to only specific tax-efficient funds.

Moreover, SMAs have an edge over mutual funds in terms of “cost basis” advantage on taxes. Mutual fund investors are liable for net capital gain tax even on those fund securities bought before the investor held the fund’s shares. In contrast, since investors directly own securities in a separately managed account, the cost basis of its capital gains/loss is the investor’s purchase price.

More Flexibility to Suit Your Changing Needs

Customized accounts also usually offer greater flexibility. Haven’t we all experienced changing financial needs with time? Sometimes these changes are unanticipated. SMAs give investors the chance to review their changing investment objectives and cash needs with a financial advisor who may then modify the portfolio, even within the same strategy, in a way that optimizes returns (including minimization of tax burden). Such adaptability is limited in mutual funds – to meet changing needs, investors have to either sell off an entire fund or switch between funds, which can be costly.

To leverage evolving market/economic conditions for investor benefit, SMA managers may also employ timely rebalancing of portfolios, to keep your asset allocation in check or adjust it as market conditions change.

Bottom Line for Investors

Instead of restricting yourself to pre-specified buckets of investments, SMAs offer the ability to customize your portfolio pursuant to your individual goals and evolving needs. The challenge is finding the right manager to help build and manage your portfolio within a separately managed account. If mutual funds can consistently outperform your money manager, then the SMA is really only offering tax flexibility – which is less desirable than strong, consistent performance.

Disclosure

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. The information contained herein has been obtained from sources believed to be reliable but we do not guarantee accuracy or completeness. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.
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