Many in the investment community criticize separately managed accounts, or SMAs, as overpromising and underdelivering on customization—these accounts’ primary reason to exist.
To ensure a manager has the resources to customize an SMA in line with your clients’ values, consider the SMA provider’s range of socially responsible features, the team focused on responsible investing research and implementation, their policies around proxy voting, and how shareholder engagement factors into their offering.
Is the provider accessible?
Beyond access to a dedicated client service team, ask whether investment professionals are available for in-depth conversations. Portfolio managers and investment strategists should be able to partner with the client service team to arrange in-person, phone, or video conferences.
With increasingly sophisticated clients and advisors, an SMA provider should help with the investment research needed to deliver tailored solutions. Having access to an agile research team that can quickly respond to your clients’ requests is critical.
It's also worth kicking the tires on any provider’s research. Are they generating new ideas in tax-managed investing, for example, or finding new data to make the case for socially responsible investing? Do they have teams dedicated to testing hypotheses, busting myths, and diving deeply into the issues that really matter to investors—or should matter, if only they were aware of them?
How closely does the SMA provider focus on tax management?
For many high-net-worth investors, taxes can represent a larger drag on returns than fees or trading costs. As a result, taxes often have a major impact on the long-term growth of a portfolio. That’s why your SMA provider should take a rigorous approach to tax management.
To begin, find out how long they’ve been tax-managing their clients’ portfolios. It’s one thing to say you do it, but it’s quite another to have deep experience and expertise in this hard-to-get-right field.
Then ask whether the provider can fund accounts in cash and transition in-kind securities. Funding an SMA with preexisting securities and then tax-efficiently transitioning to an index-like portfolio is a major benefit over ETFs. Ideally your SMA provider will help fund the account in a manner that avoids unintended gains and aligns trades with your clients’ tax and risk sensitivity.
Finally, spend time understanding your provider’s approach to harvesting tax losses—especially if you have multiple SMAs. Gauge whether the manager can coordinate tax management across all portfolios to ensure that losses realized in one account aren’t washed out by trading in another account.
The bottom line
Successfully managing an SMA isn’t easy. Too often investors default to a commingled fund or accept an SMA offering with little room for customization. It’s worth the time it takes to find a provider that can continuously monitor your clients’ portfolios, systematically harvest for tax losses, allow customization to express your clients’ values, and target common or bespoke market segments. In other words, you’re looking for a provider that delivers market exposures with much, much more. Isn’t that what your most valued clients deserve?