Closed-End Funds (CEFs)
Exchange Traded Funds
Separately Managed Accounts
Separately Managed Accounts (SMAs)
(individually) managed accounts represent customized portfolio management
for a fee. The money managers/brokers are given discretion to trade in your
account, with the goal of tailoring your investments to your circumstances.
This is an attractive
and valid investment approach, especially for high net worth and high income
investors who trust their financial advisors.
Merits of Separately
Investing - Investors can
restrict the selection of investments to conform to their unique
preferences. For instance, if one feels “tasering” is inhumane, he can ask
for Taser to be excluded as an investment choice. This is in contrast to
mutual funds, where you have no input whatsoever, as to the securities
owned by the fund.
- Tax Management
- SMAs are attractive to investors needing individual tax management
assistance. Account executives focus on maximizing portfolio values by,
among many techniques:
- Matching aggregated
capital gains with capital losses.
- Pushing back sales
dates, where possible, to convert short-term gains to long-term capital
- Avoiding “wash
- Acting as tax
coordinators among various independent managers.
Tax management is a big advantage, especially
for those investors who are accustomed to the tax drawbacks of mutual funds,
where you have no control over the realization, and amount, of capital gains
and losses. It’s not uncommon, to have to report capital gains on your tax
return, based on a fund that has declined in value.
SMAs can help investors avoid some of the tax
traps of investing.
- Access to
Professional Portfolio Managers –
Your account can be subdivided out and managed by sector or style
specialists. Even with mutual fund investing, the market is saturated with
so many choices, that it takes a skilled investment professional to
identify the best.
Separately Managed Accounts:
- Expensive –
Typically, firms get 1 to 2 % or more,
plus additional costs, if mutual funds are involved.
- High Minimum
Balances – Technology has
lowered the minimum balances required. Minimum portfolio balances for SMAs
used to range from a quarter million, to over a million dollars. Companies
are lowering the minimums, but tax and investment issues can be complex,
and if the balances are not high enough, they’re just not profitable.
Small balance accounts may not get the proper attention.
- Diversification -
Investors with low balances may
not have adequate diversification.
Performance Statistics Are Unavailable –
Since after-tax returns are not widely
tracked, they may not be reliable. Yet, one of the key benefits being
marketed is assistance on minimizing portfolio generated taxes. The jury
is still out on the effectiveness of separately managed accounts.
accounts are a very attractive investment approach. You, however, need to be
comfortable with the managers, their backgrounds, track records, and