| By Dennis Clark
FINANCIAL PLANNING
Separately Managed Accounts
With their flexibility and ability to control taxes, separately
managed accounts may be just what your high-net-worth clients
need to manage their investments.
In today’s market environment,
it’s no longer about the promise
of generating impressive returns.
It is more about risk management,
transparency, controlling costs,
managing taxes and customization.
Implementing the right separately
managed accounts (SMAs) can address each of these critical issues.
occur inside or outside the managed
account. Research has shown that
after-tax returns can be increased by
several percentage points through
tax-loss harvesting; yet, most separate account managers don’t do it.
For advisors who position themselves as wealth managers, the tax
management available through
separate accounts is something that
should not be overlooked. As stated
earlier, SMAs can be very effective in
attracting high-net-worth accounts,
given the ease of transition and the
significant tax benefit at the front end
of putting an account together.
If your new client’s current portfolio
has any stocks at a low-cost basis, the expense of liquidating everything to buy a
mutual fund is not a good way to make a
first impression on him. An index-based
separate account can likely absorb those
low-cost basis positions into the new
portfolio, and the client is more likely to
view the overall solution more favorably
from the start.
Another advantage
of using SMAs is the
ability to consider a
client’s preferences
and circumstances.
How SMAs work
Separate account managers are typically assigned a specific mandate or can
implement a client’s full portfolio in a
single account. The separate account
manager begins with a mandate that
addresses the specific preferences and
circumstances of the client, including his
tax situation. The manager then attempts
to replicate the performance of a custom
index, avoiding particular securities or
industries as indicated by the client.
A single-core equity approach allows
for a great deal of customization, personalization and control. In particular,
high-net-worth clients are well-suited
to single SMAs, which help minimize
the drag on gross performance that is
caused by portfolio turnover, capital-gains taxes and operating costs.
SMA benefits
Put simply, taxes are an expense that
erodes investment returns. SMAs
have the ability to generate tax alpha
through active tax management to
create superior after-tax returns.
An SMA managed to an index can
focus on creating tax alpha, execut-
ing a tax-loss harvesting strategy.
This can help offset capital gains that
Advantages of personalization
Another benefit of using SMAs is the
ability to consider a client’s preferences and circumstances. Advisors
who are advocates of index-based
investing have more opportunities to
craft a tailored, dependable outcome
for their clients than the traditional
index-based solutions. Customization criteria can include socially
responsible investing, low beta to a
specific security and weighting toward
or away from a specific industry or
investment style.
With the right tools, portfolios can
be built from existing positions and can
work within the mandate of the client’s
tax goals. To help achieve greater diversification, a portfolio can be constructed
to counter a concentrated stock position
and offset the risk it inherently adds.
This is a common approach for
advisors who work with corporate
executives or clients who inherit stock.
For example, a client who is an executive at a pharmaceutical company
probably doesn’t need more exposure
to that particular stock or any other
pharmaceutical stock. A separate account has the flexibility to make this
type of adjustment.
The same is true for a client’s particular investment preferences. Let’s say a
client is inclined toward socially responsible investing. Using a separate account
manager, the advisor can integrate a level
of personalization that takes such factors
into consideration.
Dennis Clark is president of Advisor Part-
ners, LLC, a wholly-owned subsidiary of
Bellatore Financial Inc. Contact him
at 415-477-9977.
