It may be a mouthful to pronounce,but separately managedaccounts (SMAs) have been hotfor the last few years, and it'seasy to see why. These versatiletools boast the convenience of mutualfunds by holding a range of securities,but also go a step further. Unlikemutual funds, SMAs allow physician-investorsto actually own the individualstocks. This beneficial featuregives you more flexibility to customizeyour holdings and react to changes inyour personal situation.
Once reserved for the wealthy, theaccounts required a minimum investmentin the six-or seven-figure range.But minimums are falling to as low as$25,000, thanks to improvements inthe technology necessary for a portfoliomanager to keep track of individualaccounts. One feature of SMAs hasn'tchanged much over the years, though:You'll need to go through a financialplanner to access a portfolio managerand open an account. You and yourfinancial advisor should consider thefollowing questions:
Does an SMA help withdiversification?
Like mutual funds, SMAs are runaccording to different investmentstyles, such as large cap, growth, orvalue. If all of your money is in oneaccount, your assets won't be diversified.That's why—if you do not diversifyin any other way—you probablyshould have at least three SMAs, eachoperating under a different style.
Do I need the extra flexibilityof an SMA?
Flexibility is great, if you have a reasonto take advantage of it, and SMAscan help in two areas: taxation andcustomized allocation.
Because you own the individualstocks in your account, you can sellshares that have appreciated. To offsetcapital gains taxes, you can sellstocks that have lost their value andavoid the financial hit. You can alsodo the same for gains in other areas ofyour portfolio (eg, the sale of art orreal estate). A mutual fund doesn'tgive you the same opportunities.
Furthermore, your account's portfoliomanager can customize the allocationto fit your investment needs. Forexample, a technology executive mayhave stock options in their companyand not want any more exposure totechnology shares. With a mutualfund, that executive would have no sayover what shares are in the fund. Withan SMA, the executive could refrainfrom buying technology stocks.
When can I access myaccount's information?
You can find out at any momentwhat stocks are in your SMA and whatthey are worth, unlike mutual funds,where reporting is infrequent and notin real time. This type of precisioncould encourage micromanagement,so be sure you are ready for it.
What are my financial goals?
It's important to match your investmentvehicles with your long-termneeds. You should use an SMA as longas it fits into your existing plans andgoals. Don't open one just becauseyour friend has one and you don'twant to feel left out.
Although SMAs may be hot, it's importantto keep one thing firmly inmind: They're just tools. Before youpick them up, you need to know whatyou're building. Only then will SMAsgive you the best results for yourinvestment needs.
Richard M. Braverman, CFP®, RFC, is a principal
of Braverman Financial Associates in
Lancaster, Pa. He has more than 20 years of
experience in the industry and is a registered
representative offering securities
through FSC Securities Corporation as well as a registered
broker/dealer. The views are those of Richard M.
Braverman, CFP®, RFC, and should not be construed as
investment advice. Braverman Financial is not affiliated
with FSC Securities Corporation.