What is SMA?
A separately managed account (SMA) is a term within the investment management industry. Characteristics include an open structure or flexible investment security choices; multiple money managers; and a customized investment portfolio formulated for a client’s specific investment objectives or desired restrictions.
The term “SMA” refers to an account which is managed by portfolio management resources within a firm, or more commonly, by an outside money management (investment advisory) firm along with an administrator. In this context, an SMA can be thought of as an investment vehicle similar to a mutual fund, in which the customer pays a fee to a money manager for its services managing the customer’s investment. The important difference is that a mutual fund investor owns shares of a company that in turn owns other investments, whereas an SMA investor owns the invested assets directly in his own name.
SMAs were developed in the 1970s to accommodate accounts and clients who needed to meet specific objectives that did not fit within the constrictions of a mutual fund investment. It is the freedom of choice of professional managers, portfolio customization, objective investment advice for a set fee, diversification (or concentration should the client choose), tax efficiency and general flexibility that have made SMAs popular among informed investors.
The benefits of SMAs are well known to many asset managers: the lack of embedded capital gains; the ability to manage capital gains through tax gain/loss harvesting; and the ability to purchase more or less of an individual security to balance out an existing investment portfolio.
An added benefit of SMAs is the amount of transparency that is a necessary and integral part of this investment vehicle. An SMA has multiple, individual parties involved in the investment process, which makes it less likely for fraudulent activities to take place. There is the asset manager such Mckeown Marrs Securities who works with the investor to create and execute a strategy that meets that individual’s goal. There is also a prime broker dealer – Mckeown Marrs Securities who is responsible for the day-to-day maintenance of the account. Finally, there is the custodial firm – Interactive Brokers, which handles the clearing and custody of the investments. Having multiple, independent parties handling the different steps involved in executing an investment plan make it exponentially more difficult to perpetrate a fraud.
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This article does not take into account the investment objectives, financial situation or needs of a particular person or entity. Before acting on any investment strategy or advice you should first consult with your current ASIC accredited investment professional or seek out a compliant investment professional for such.