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Can SMAs give you more control, flexibility, and tax benefits?

Can SMAs give you more control, flexibility, and tax benefits?

| October 13, 2022

As the name indicates, Separately Managed Accounts (SMAs) are a professionally managed portfolio of securities. These accounts are similar to an ETF or mutual fund in that they have a variety of securities within them. However, a SMA contains securities owned directly by the investor while also being professionally managed for the investor. This creates a lot more flexibility in what funds the portfolio is invested in, how it is managed, and transparency into the individual trades made.  

What type of investor is suited for SMAs?

Each investor has varying needs, risk tolerance, and goals. SMAs could be a good fit for an investor who:

  • Is in a high tax bracket
  • Wants more investment customization
  • Has a high concentration in an individual security or industry
  • Owns securities which have appreciated significantly
  • Has a sizable amount to invest
  • Has a large tax event approaching

What are some benefits?

Customization:

These portfolios can be specifically designed to meet the investor’s needs and values. Investors who want to include, or avoid, certain sectors because of their personal values will find the flexibility of a SMA attractive. And if the investor is already concentrated in certain positions, the SMA can work around those holdings so the investor doesn’t become overconcentrated.

Tax benefits:

SMAs are a helpful tool in increasing an investor’s tax optimization. Since the investor owns the underlying securities, there is more control over realizing capital gains or losses. The account can be used to offset capital gains from one investment by taking advantage of tax losses in another investment. These accounts can also be used to manage tax consequences throughout the year rather than just evaluating tax opportunities once at the end of the year. Getting ahead of tax consequences can keep more of your money working for you throughout the year.

Transparency:

The investor has a deeper level of clarity on what trades are being made on their behalf in a SMA. Working directly with a wealth manger allows you to have direct and regular communications about what changes are happening in your portfolio.

Cost Effective:

A SMA may cost less than investing in mutual funds or trading in taxable brokerage accounts, depending on the account size and fee structure. An asset-based fee assessed by a SMA can be a lower cost than a mutual fund because you won’t be typically paying commission fees or fund expense ratios.   

 

What are some drawbacks?

Larger minimum investment:

The minimum buy-in is typically a lot higher than a mutual fund. The initial investment usually has a minimum of $50,000 to $250,000. This would not be a fit for investors with a lower amount available to invest.  

Less Diversification:

Some SMAs hold individual stocks and wouldn’t be as diversified as a mutual fund or ETF that could hold thousands of different stocks. However, our approach is that we use multiple SMAs which is actually better able to focus on their “niche” specialty as opposed to many hands in many sectors. Talk with us about how the SMA can improve how you are concentrated in your allocations..

 

Working With A Professional

Many investors work with a financial advisor so they can utilize a professional who will do the research and analysis for them. Brentwood Financial Advisors evaluates each investors goals and risk tolerance to tailor a financial plan that aligns with their needs.

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