Personal Dividends - Money and Lifestyle

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If you have substantial assets to manage, you have many different options. You could choose to invest using mutual funds, or you could choose buying stocks on your own, possibly with help from your investment management professional. You may have also considered the option of establishing a portfolio of separately managed accounts with diverse strategies. And what about investing in Hedge Funds?

Buying stocks on your own requires significant commitment of time and resources to conduct due diligence on the companies, while if you choose to buy mutual funds than you may feel constrained by the nature of the mutual funds. Mutual funds pool money from many investors and as a result you lose the ability to customize or direct the investment choices to your preference. Other option is to construct a portfolio of ETFs (or index funds indexed to different sectors and styles). However, you or your investment management adviser will still need to spend time every year adjusting the asset allocations. Or you may secretly covet the returns that some of the best hedge fund managers deliver but are leery of the lack of liquidity and information on your invested assets as well as the high fees that are charged on the invested assets (recent turmoil in the hedge fund industry no doubt has added to your misgivings).

Ideally, you would like to invest with a professional money manager that makes investment management decisions on your behalf but takes into account your specific requests or situational needs. This kind of professional money management tailored to an individual was traditionally only available to ultra-wealthy, but this is no longer the case today. Consider the recent rise in popularity of Separately Managed Accounts or SMAs for short.

Separately Managed Accounts or SMAs

Separately Managed Accounts are now being offered through many brokers and investment advisers. While the minimum investment requirements vary by the SMA money manager, there are funds that can be invested in with as little as $50,000 or $100,000. Just like mutual funds, different SMAs may target different investing styles (Large Cap, Small Cap, Value, Growth, Blend, Income, etc) so you need to keep in mind that if you want to diversify across different styles by investing in multiple SMAs at one time, you will need to meet the minimum investment requirement for each of the SMA. You can alternatively choose a Blend SMA as your initial foray.

Benefits of Separately Managed Accounts

Separately Managed Accounts offer many benefits over other ways of investing:

• Access to high quality money managers at lower capital requirements compared to a hedge fund or a institutional grade money manager. This makes it possible to use SMAs for even IRAs if one so chooses.
• Ability to direct certain aspects of investments. Say you are have significant exposure to your employer’s stock or real estate in a different part of your portfolio. You can direct your SMA money manager to not include that stock or sector in your investments. This ability to direct the investment management of your account is what sets Separately Managed Accounts from other forms of pooled investments.
• Separately Managed Accounts are custom to you. While the money manager may be utilizing a strategy which may be common to other accounts he or she manages, your account is managed separate from other accounts (it is not pooled with other investors). This means that every security that is owned in your account has a cost basis that is unique to the account holder. The performance reports will therefore layout everything that you own and how much is invested in each security along with the cost basis.
• You have discretion and flexibility to offset gains and losses for tax purposes either within the account or even with investments outside the SMA unlike in a mutual fund where all investors in the fund take whatever capital gains or losses are declared on the fund.
• You gain diversification and professional management with the level of involvement that you choose.
• Separately Managed Accounts offer greater transparency, better liquidity and regulatory oversight compared to hedge funds.

Drawbacks of Separately Managed Accounts

• The principal drawback is the level of fees. Typically the fees range from 0.5% to as much as 3% of the Assets under management. These fees are high compared to a portfolio of ETFs where you may average an expense ration of 0.25%, or even with many no-load mutual funds. However, the fees compare very favorably to hedge fund fees, or even with many load mutual funds that are typically sold through investment advisers that have front or back end loads, 12b1 fees, expense ratio, etc.
• Depending on whether the manager is active or passive, there could be high transaction costs that may cut into your returns.

In summary, while Separately Managed Accounts may not be for everyone, for those that qualify, it may be a good option. If you are a DIY investor, you will do without a SMA just fine with the number of ETFs and mutual fund (and individual stock) options available to you. On the other hand, if you lack time to manage your investments and would rather have a professional manage it for you with occasional direction from you, it is worth to consider a SMA product. Typically, someone who owns or manages a business, or a professional who is constantly on the go, will appreciate the benefits of Separately Managed Accounts.

More information on Separately Managed Accounts can be had from your investment adviser, or your broker.

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