It used to be that you needed to investa minimum of $1 million for yourmoney to receive the personalizedattention of top-notch money managers.Not any more, thanks to separately managedaccounts (SMAs). These accountsmake it possible for physician-investorswith as little as $300,000 to receive preferentialtreatment.
Banks, brokerages, and fund companiesoffer SMAs. According to an article in, SMAs farm out your money tothe best money managers available. Thesemanagers then buy and sell securitiesbased on your preference for asset allocation,industry, or individual company. Ineffect, you have your own, personalmoney managers.
According to the Money ManagementInstitute, SMAs have grown bynearly 7% a year since 1999, and nownumber 2 million accounts with $443 billion.That growth is expected to continue,increasing to more than 12.5 millionaccounts with $2.1 trillion by 2011. Someof the top brokerages account for about80% of the SMA market combined. The article credits tax managementfor their popularity.
With SMAs, investors own securitiesdirectly and establish their own basis, sothere are no surprises come income taxtime. In comparison, when you purchasemutual funds, you're buying an imbeddedbasis and could end up paying taxes ongains that you did not benefit from. Forexample, the article points out that anequity fund's load-adjusted 10-year returnof 7.5% actually drops to 5.5% after taxesare taken into account.
Working through their financial advisoror broker, investors can instructSMA managers to either avoid or stockpilecertain types of investments. Investorscan also adjust the asset allocationto reflect changing circumstancesin their lives. Of course, if you do notcarefully specify your investment preferences,your portfolio could bear a strikingresemblance to the portfolios ofother investors in the program. This isthe main reason why critics of SMAs seethem as nothing more than separatelymanaged mutual funds.
In addition, be sure to keep in mindthat money managers, like many otherprofessionals, really do not respond wellwhen told how to do their jobs. Similarly,they won't take kindly to your frequentchanges of instruction. To achievethat level of service (ie, having a moneymanager at your beck and call), you willhave to cough up at least $1 million toinvest with a private banker or traditionalinvestment manager.
Performance & Expenses
SMA managers handling US equitieshave returned an average of nearly 11%for the past 10 years before expenses,according to the research firm Effron.Morningstar notes that mutual fundshave returned 7.7% over the same period.Part of the strong performance by SMAscan be attributed to the fact that SMAprograms regularly weed out poor-performingmanagers, which is not alwaysthe case with mutual funds.
SMA fees tend to be significantlyhigher than mutual fund fees.According to Lockwood Financial, totalfees for SMAs can average between1.25% and 2.70% of assets a year, comparedwith a 1.42% average for mutualfunds. The high fees are a result of all themany individuals involved in handlingyour SMA. Talk with your financial advisorto find out whether you should changewith the times.