2014 / Behavior

Is your brokerage statement over 80 pages?

I just sat down with a prospect last week and it was the second time in a month that the issue of Separately Managed Accounts (SMAs) came up in a conversation.   The first time it came up was around a prospect who was sold by a brokerage firm that his account was "too large" to be in a diversified portfolio of mutual fund and ETFs,  and was advised that he needed to take advantage of the benefits of the owning individual stocks in their portfolio by being in the brokerage company's SMA platform.  Then the issue came again last week when a prospect came in with a 86 page brokerage statement from her UBS account that she was looking at getting a second opinion on.

(Disclaimer:  We recommend investors being in baskets of stocks in the form of mutual funds or ETFs - not in SMAs.)

So what is a Separately Managed Account?

An SMA is an individual investment account, managed for you by a portfolio manager usually outside the brokerage firm. So instead of owning one mutual fund that owns 150 stock in it, you would actually own all 150 stocks in your brokerage account.  These portfolio managers have sophisticated trading systems that give them the ability to buy a trade in every single one of their Separately Managed Accounts.  They are doing this for thousands of clients on each buy and sell they make.

Separately Managed Accounts (SMAs) have grown in popularity in recent years, with total assets increasing from $433 billion in 2009 to $606 billion now, according to research firm Cerulli Associates. Investment managers, brokers and investment advisors originally positioned SMAs as direct access to "top" portfolio managers for their biggest and most affluent. Now, the same investment organizations actively promote SMAs for even their smaller investors.

We never see investors actually take advantage of SMA benefits.

There seem to be two advantages often talked about.

  1. You can provide the SMA portfolio manager with a list of investments to exclude or a list of investment categories to exclude. This brings up the question of whether you should be telling your investment advisor what to be investing in - in the first place.  If you have super strong views about certain sectors of the economy that you might want to avoid (tobacco stocks, guns, etc), their are great mutual funds out that where managers are focused on building portfolios that are "green" or "socially responsible".  The other thing is that I have never seen a prospect come to us who was in an SMA - who ever took advantage of asking one of these SMA portfolio manages to tweak their set of investments.

  2.  The portfolio manager can take into account your tax situation in buying and selling securities. This is a great concept - but who takes advantage of this?  Ask your friends who may be in these accounts if they have ever instructed their broker/advisor to tell their SMA portfolio manager to do some specific tax lot harvesting for them.  I would guess it rarely happens.

Why we invest through a mutual funds structure for our clients:

A mutual fund is an investment management company, owned by its shareholders. The shareholders hire an advisor to select the securities that the mutual fund will own. Mutual funds and their advisors are heavily regulated by the SEC, and must follow an important set of rules, most of which are contained in the Investment Act of 1940. These rules have to do with treating shareholders fairly, disclosing certain kinds of costs, etc. Mutual funds have been the investment vehicle of choice for most individual investors since the mid-1970s. The SMA portfolio managers are not as regulated.

An argument can thus be made, and a pretty strong one too, that investors are better off with mutual funds, which is a more attractive investment vehicle when compared to SMAs. Here’s how:

  • Mutual funds are more efficient.

  • Mutual funds are better regulated.

  • Better information is available about mutual fund investments.

  • Better information is available about mutual fund performance. Performance can be difficult to gauge, because SMA strategies are at the discretion of individual managers, and because the accounts can invest in a broad swath of assets, there aren't any universal benchmarks to compare the results against.

  • There is no hard evidence available that SMAs are more likely to produce better investment performance.

What is right for you?

Talk to your adivisor about it.  The big brokerage firms love to sell the  "managed for you" line when they sell SMAs  This is emotionally attractive to the individual investor. Who wouldn’t want a "top-flight portfolio manager" picking investments just for them? But the reality is that mutual fund investors do have such portfolio managers working for them. The companies and the portfolio managers managing SMAs are also managing a mutual fund of that same portfolio. They use the same strategies and pick the same investments, by and large, as they do for mutual funds.

Start the discussion with your advisor to see what they think?
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