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Separate Managed Account Business
Fees Professional money managers' fees typically run from 1% to 3% of assets under management. A prospectus is not issued for a separate account. Managers list their basic fee structures in a regulatory filing called a Form ADV Part 2. An investor can obtain this document by contacting the manager, but they tend not to be as widely available through unrestricted online downloads as mutual fund prospectuses. Moreover, the published fee schedule in the ADV Part 2 is not necessarily firm—it is subject to negotiation between the investor (or the investor's financial advisor) and the money manager. Often, it is not a single fee but a scale in which the fee (expressed as a percentage of assets under management) decreases as the asset volume (the amount invested) increases.
The Importance of Due Diligence Because SMAs do not issue registered prospectuses, investors or their advisors need to rely on other sources for investigating and evaluating the manager.
Tax BenefitsConsider, for example, a separate account portfolio in which two securities have been purchased at similar prices. Over time, one of the securities has doubled in value while the other has fallen by half. By instructing the money manager to sell both securities, the gains generated by the security that has doubled in value are offset by the losses in the other security, reducing considerably any capital gains tax liability. The proceeds from the sale can be reinvested, maintaining the balance in your account. In a similar fashion, if you sold real estate, art or other investments at a profit, but have unrealized losses in your separate account, you could realize the losses and use them to offset the gains from the sale of your other investments.
Another tax benefit that comes with SMAs is the lack of embedded capital gains, a common issue with mutual funds. Since mutual funds are "mutual," all investors share the tax liability on the capital gains incurred by the fund, which must pay them all out once a year. So, for example, if the fund doubled in value from January through November, investors purchasing into the fund in December did not get the benefit of any of those gains, but they do inherit the tax liability because the gains are embedded in the portfolio. Separate account investors, thanks to individual cost basis on the underlying securities, would not be liable for capital gains generated prior to the day they invested in the portfolio.
What Is a Separate Account? A separate account is an investment portfolio owned by an investor and managed by a professional investment firm—typically registered investment advisors(RIA). Although separate accounts are usually opened through a brokerage or financial advisor, they may also be held at a bank or opened with an insurance company. Sometimes these accounts are referred to as separately managed accounts (SMA) or individually managed accounts.
In a separate account, funds are not pooled with the investments of other investors. Investors can choose from a range of approaches in order to create a portfolio that is oriented towards their individual investment goals. An RIA or portfolio manager is in charge of making investment decisions on a day-to-day basis. Armed with discretionary authority over the account, the dedicated manager hired by the investor actively makes investment decisions pertinent to the individual, considering the client's needs and goals, risk tolerance, and asset size.
A SMA is a portfolio of assets managed by a professional investment firm. In the United States, the vast majority of such firms are called registered investment advisors. These firms operate under the regulatory auspices of the Investment Advisors Act of 1940 and the purview of the U.S. Securities and Exchange Commission(SEC). The portfolio manager is responsible for day-to-day investment decisions. SMAs differ from pooled vehicles like mutual funds in that each portfolio is unique to a single account (hence the name). In other words, if you set up a separate account with Money Manager X, then Manager X has the discretion to make decisions for this account that may be different from decisions made for other accounts.
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