Do you want to hire your own private money managers as wealthy people do? Now you can! Historically, having a team of professional money managers working directly for you was reserved for the superwealthy. However, with the advent of institutional separately managed accounts (SMAs), sophisticated retail investors can now hire their own private money managers to pick stocks and manage customized portfolios on their behalf. SMAs are quickly replacing mutual funds as the investment vehicle of choice for savvy investors because of their flexibility, tax benefits and access to top-notch professional money managers who are not available through traditional mutual funds.
As the name suggests, SMAs are distinct investment accounts managed by a professional money manager on behalf of the client. Within this structure, the money manager selects and manages the individual securities that will go into the account, which couples the benefits of individual stock and bond ownership with the protection of a proven investment strategy. Still, what makes SMAs such a powerful investment vehicle is their customization, tax benefits and portability.
Portfolio customization is a big plus for investors. Portfolio customization allows the investor to embed existing individual stocks they may own outside the SMA portfolio into the SMA. If the money manager accepts these stocks or bonds, and they often do, they will construct a portfolio around these securities. This eliminates the need to sell all existing holdings to gain access to the diversified SMA portfolio. In addition, many SMA managers allow investors to remove from their portfolio securities they may not be interested in, such as those of tobacco and alcohol producers.
Tax flexibility also sets SMA accounts apart from traditional mutual funds. When you invest through an SMA, the money manager purchases your holding once the account is open. In this way, you begin investing with a zero cost basis on the account. Conversely, when you purchase a mutual fund, you are purchasing a unit interest in a pool of securities with ca-pital gains already embedded in them. As such, you are subject to paying ca-pital gains taxes on transactions that you may not have benefited from. Sadly, during the last few years, many investors endured the tax impact of capital gains distributions declared by mutual funds while experiencing negative returns on their investments.
Finally, SMAs provide the investor with flexible portability. If you choose to change from one money manager to another, you simply move the individual securities over to the new manager. This lowers the overall cost of transitioning from one professional money manager to another. To move from one mutual fund manager to another, even within the same mutual fund family, you have to sell the mutual fund for cash, incurring a taxable event.
While all major brokerage firms and most money managers offer SMAs to their clients, with minimum-per-account investments ranging from $50,000 to $500,000, few minority-owned advisory firms offer them. One of the few, Wealth Management Network (www.wmnllc.com), provides access to more than 100 top institutional money managers through SMAs. Consult your financial adviser on the use of SMAs in your overall portfolio.
David A. Hinson is principal at Wealth Management Network, a New York City investment advisory firm. He can be reached at 646-375-2388, or via e-mail at firstname.lastname@example.org.
By David A. Hinson