Separately Managed Account (SMA)
In this type of account, the investor directly owns a basket of securities that a professional money manager selects. Generally the money manager is a third-party selected by an investment advisor on behalf of the investor. This account provides greater transparency than a mutual fund, which only discloses the underlying securities held four times per year. The investor can see the securities held and receive confirmation on trades made in an SMA daily.
- Transparency—all securities and trades are visible
- Potential for greater tax efficiency
- Potential for lower fees compared to other alternatives
- Often portfolio managers must make compromises in the investment strategy to accommodate low minimums in SMA platforms.
- Transparency to see individual portfolio holdings often makes it tempting for the investor to attempt to intervene in the management process and try to sell apparent big losers
- SMAs are often marketed as individually managed, when in fact they are generally managed to a single-model portfolio applied across all investors regardless of tax status or differences in their individual tax lots such as purchase price and/or purchase date
1. Is the strategy being considered available as a mutual fund or to large institutional investors? If so, what differences are there between the SMA portfolio and the other portfolios?
2. Will the account be managed in a way that is sensitive to tax consequences based on my personal tax rate or is the management uniform across all investors regardless of tax rate?
3. Please show me the track record of this portfolio versus the appropriate index.
4. How long has this SMA been recommended by your firm?