A guide to Separately Managed Accounts (SMAs) | Money Management (2023)

A guide to Separately Managed Accounts (SMAs) | Money Management (1)

Indy Singh addresses the 10 most-asked questions about separately managed accounts as misconceptions often lead people to perceive them with negative connotations.

Separately managed accounts (SMAs) are being touted as the Grim Reaper for managed funds, but this is just one of many misconceptions. This article aims to address the frequently asked questions about SMAs.

1. What is anSMA?

An SMA is a portfolio built for an investor, comprising of a mixture of one or more portfolios of a limited number of listed securities, one or more managed funds and cash.

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On the face of it, this is not much different to what many professional and experienced financial planners could be building for their clients and also retaining the flexibility to alter investments as required.

In an SMA the financial planner/adviser outsources the total portfolio construction to a stock broker or platform operator, or adopts a portfolio of shares that attempts to replicate the largest holdings of a recognised fund manager and adds a managed fund or two (generally an international share fund or fixed-interest fund) and has this held on a wrap platform.

Recently, some companies constructing share portfolios have emerged and – while they are not recognised fund managers – they provide portfolio construction services for a fee. Financial planners may dial up this fee for themselves as an investment management fee and thereby increase their revenue.

In these instances, a client share portfolio is offered as a managed discretionary account (MDA) where the issuer of the MDA is expressly permitted by the investor to alter the portfolio without seeking instructions from the investor. An MDA is managed by the issuer through an agreement with the investor.

2. Can a financial planner change a client’s portfolio?

In most cases, no. But, if the planner holds a limited power of attorney to make alterations to a portfolio they may do so. So, read the fine print in a product disclosure statement (PDS) – whether it is part of the application form or if a separate authorisation is to be made.

While it is widely reported that financial planners or their clients can alter an SMA, think again.

Why would a client or a financial planner pay fees to an external party for this service if they wanted to make portfolio management decisions and alterations themselves? Where an MDA or a specially built portfolio is adopted in an SMA by a financial planner or an investor by paying a fee, why then would the planner or investor make portfolio decisions against the professionals who designed the MDA in the first place?

3. Is an SMA tax-efficient when compared with a managed fund?

An SMA could have been tax-efficient in the past when distributions of income and capital gains were made once a year from managed funds (managed investment schemes).

However, most managed funds now distribute quarterly, so it would only be the past quarter’s results that would impact the investor. Thereafter, they would be a participant like all the others.

In the case where an SMA adopts, say, 10 or 15 shares of a fund manager’s portfolio and the fund manager sells a share to make a capital gain or a loss, then the SMA will have to follow suit. If it does not, because of tax reasons, it will seriously risk being completely out of kilter with the fund manager’s portfolio.

A note of caution: when making a recommendation to clients to invest, planners must consider first and foremost the quality of the investment.

There have been instances in the past when investments were encouraged for tax reasons, such as timber plantations for example, even though the underlying investments were not sound as time has proven.

4. Can share portfolios in an SMA deliver better returns than fund managers?

Not necessarily. Portfolios have been built out of truncated portfolios of managed funds and not entire holdings. Therefore, they cannot definitely produce the same or better results. Some fund managers also provide details of security alterations once a month while they may be altering their own fund portfolios each day.

In other words, if a fund manager sold BHP Billiton when it was priced at $23.80 in the first week, but told the SMA to sell at month-end when it was priced at $18.09, the client might not be happy.

5. Can investors transfer MDA shares and units in funds to beneficiaries?

Yes. You can transfer individual shares as part of your estate. If the beneficiary wishes to continue owning the shares they then take on the risks of managing their assets, in the form of shares.

You can also transfer units to beneficiaries. Capital Gains Tax (CGT) implications and carry-forward of the cost base is the same for SMAs.

6. Can share portfolios and units in a fund be transferred to other platforms?

Shares can be transferred in specie and so can units. The catch here is that the recipient platform must be in a position to accept them.

7. Are SMAs cheaper?

This depends what the platform charges and what the portfolio builder charges for their services.

MDA fees can vary from zero on some platforms to 1.25 per cent.

Platform fees generally start at around 0.5 per cent to 0.6 per cent a year. Some have transaction fees and some do not. So a proper research of platforms is recommended.

8. In SMAs, investors can see all the securities they hold – is this possible in a managed fund?

Only those securities held in an SMA are transparent. If an investor holds a managed fund such as an international share fund within an SMA, then securities in the managed fund may not always be visible unless the fund manager publishes them.

There are instances where fund managers exhibit all the securities they hold, or the top 10 or 20 holdings.

9. Is having few shares better than having many in a fund?

A few shares can help investors make a killing, or on the flipside, get killed. A small number of shares can be expected to exhibit greater swings of volatility when compared to a 50 or 60-share portfolio in a managed fund and seriously more than the 140 or so securities in a multi-manager style fund.

In the current global economic environment, extreme bouts of volatility are being experienced. Investors need to be warned of the risks arising from holding a few shares only.

10. An SMA built using AN ETF is better than a managed fund. Is this true?

This is not true. Remember that an exchange traded fund (ETF) is itself a fund even though it can be bought and sold like a listed security. In most cases it is itself replicating an index that could be weighted on the basis of the capitalisation of a company – i.e. larger capitalised companies comprise a greater percentage of the index.

There are a couple of points to note. By investing in an index, you are actually investing up to 70 per cent of the money into the 10 or so largest company shares and very little in the other 300 or so companies which might have more potential for growth.

Planners should also advise their clients that they will never ever obtain an index return through an index ETF – in fact, the result for a client will be well below index.

This is because the platform fees, portfolio construction fees, planners’ advice service fees along with other charges such as transaction costs and brokerage and the like all reduce returns to clients.

On the other hand, fund managers at least have targets to outperform their relevant indexes and after-fees and charges could deliver above an index return.

Indy Singh is the managing director of Fiducian Group Ltd, the company he founded in 1996.

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