The Key Advantages/Benefits of Separately Managed Accounts (SMA) versus pooled investments (mutual funds, segregated funds, etc.)
Fees
The fees for SMAs are generally lower than for pooled investments. Larger accounts can pay as little as 1% or less and because the fees charged on taxable accounts are tax-deductible, in cases where individuals are in a high tax bracket, the fee can be as little as approximately 0.50% or less. The Management Expense charged on segregated funds is generally much higher than the fees charged on SMAs and is not tax-deductible and generally is also not tax-deductible for A class mutual funds.
Tax Efficiency
SMAs provide a cost base that is unique to each investor which means that realized gains or losses reflect the actual gains and losses for the investor. The structure of pooled investments is that they are managed in aggregate for all investors. This can lead to unexpected taxes being triggered, regardless of whether the fund value has gone up or down since an investor acquired it.
SMAs provide the ability to control the timing of transactions that have tax implications. In an SMA, your cost base is just that – your own, thus allowing you to plan for taxable events. This provides some very valuable benefits like tax-loss harvesting.
Customization
No two investors are exactly the same. Most have different expectations of return, the risk they are prepared to assume and even the amount of cash flow they may require from their portfolios. An SMA, by definition, allows each investor to have each of these factors set to meet their own expectations and defined in their individual Investment Policy Statement. Unlike pooled investments, an investor can specify whether they want or do not want specific security to be held within their portfolio. Pooled funds invest in assets that are consistent with the Investment Objectives stated in the Prospectus.
Management Focus
SMA portfolios reflect the investment style of the Portfolio Manager and the constraints of the Investment Policy Statement. This allows the Portfolio Manager to focus research on a manageable number of companies within their area of expertise, allowing for a better understanding of both the companies and the industries in which they operate in. By utilizing the investment services of 2 or more Portfolio Managers, an investor can create an extremely effective and efficient diversification. Pooled investments tend to employ a wider investment focus that reflects the stated Investment Objective.
Transparency
SMAs allow investors to be fully aware of exactly what they are invested in. Pooled investments typically provide much more limited information, with the fullest detail provided in Annual Reports. SMAs provide monthly statements that demonstrate exactly which securities paid a dividend or interest and the payments are made directly into the investor’s account. This type of transparency is generally not available from pooled investments. Investors with SMAs receive immediate transaction confirmations and monthly statements from the Custodian while mutual funds never provide transaction-level details.
SMAs hold assets (securities and cash) under the direct ownership of the client and the client can view their portfolio online 24/7.
Performance
SMAs have the potential to produce superior returns because the portfolio can be efficiently invested. SMAs typically remain fully invested and any changes, both additions and withdrawals, occur only as directed by the investor. Pooled investments can experience inflows of new investor purchases and outflows of Investor redemptions on a daily basis. Pooled investments often receive information about purchases and redemptions late in a business day and are unable to adjust the portfolio immediately, creating a need to hold cash balances to accommodate these investment cash flows. Investors in SMAs can provide the Portfolio Manager with some time to create liquidity within their portfolio for large, unscheduled withdrawals that they know they are going to make.
Service
SMAs allow the investor to receive a superior level of service from the Portfolio Managers. Investors receive a customized investment solution, reflecting the parameters of the Investment Policy Statement and the direct relationship with the Portfolio Managers. Investors can actually speak directly to the Portfolio Manager regarding their specific questions or concerns regarding their specific portfolio. Pooled investments do not provide a customized investment solution or a direct relationship with the Portfolio Manager.
Individual Reporting
Most investors want to know exactly what their returns have been on their investments in order to see if the results will allow them to achieve their individual goals. An SMA shows the precise return on investments. This is generally not available from pooled investments.
Flexibility of Redemptions
Risk, as it relates to investments, has often been defined as “being forced to liquidate at an inopportune time”. Sometimes investors are forced to liquidate at unexpected and inopportune times. With an SMA, the Portfolio Managers can decide which specific securities they will liquidate when an investor requires a withdrawal. Even in down markets, there are generally some investments that may not have experienced the same negative effects of the market that can be redeemed. With pooled funds, the investor is liquidating shares or units of the pool and if the unit price is down, they have to redeem more units because they are unable to choose which investments to specifically liquidate.