What is the difference between a fund and an SMA?
A key distinction between investing assets in an SMA or fund-of-one that is often overlooked is that the owner/investor in an SMA directly owns those investment assets. This is not true of an investor investing in a fund-of-one. In the latter, the fund owns those assets, not the investor.
Managed account-holders have maximum transparency and control over assets; mutual fund-holders don't own the fund's assets, only a share of the fund's asset value.
Whereas an SMA is your own personal mutual fund, Direct Indexing is your own personal index fund. You can still customize the account the way that you want (Direct Indexing is just a marketing term after all), but you're just starting with an index as the base of the account.
With SMAs, there are no embedded capital gains to worry about. Since the underlying securities are purchased directly, end investors will only pay taxes on gains they've received a direct benefit from, making SMAs a more tax-efficient vehicle compared to mutual funds.
SMAs share certain traits with mutual funds and ETFs, but they may have some unique advantages. Unlike mutual funds and ETFs, SMAs offer direct ownership of stocks, bonds, and other holdings, so you always have complete visibility into what you own.
Mutual funds are primarily retail products, which gather assets from vast numbers of individuals who have limited balances to invest. Institutional accounts gather assets from a limited number of clients who have millions or even billions of dollars to invest.
With SMAs, since each client directly owns the underlying stocks and bonds, you get visibility into the underlying securities, greater fee transparency and the ability to customize holdings to align with tax management and values preferences.
SMAs offer direct ownership of securities and tax advantages over mutual funds. Investors must do due diligence before committing to a money manager whose discretionary services cost 1% to 3% of assets in the portfolio.
Direct ownership—Investors in SMAs own the individual securities in their portfolio, providing the opportunity for enhanced tax planning and customization. Fees can be lower—SMAs have a more efficient underlying structure that may be less expensive than mutual funds.
A separately managed account, or SMA, is just what it sounds like: a portfolio of securities that's professionally managed separately from other portfolios. The portfolios are made up of stocks, bonds, and other securities and can be customized to align with an investor's unique goals and preferences.
What are the disadvantages of SMAs?
Cons of SMAs. Some disadvantages include complicated fee structure, high investment minimums, and intensive work.
While SMAs have many benefits, most things, even the best separately managed accounts, have drawbacks. Higher buy-in: Many SMAs have substantial minimum investment requirements, ranging from $50,000 to $100,000 and even higher for some accounts, limiting access to this type of investment to high-net-worth investors.
With SMAs, there are no embedded capital gains to worry about. Since the underlying securities are purchased directly, end investors will only pay taxes on gains related to their account and not those of other investors, making SMAs a more tax-efficient vehicle.
Fidelity SMAs charge gross advisory fees that range between 0.20% and 1.5%, and vary based on total assets invested.
In most situations, you will find what you need at Fidelity. There are a few downsides. Fidelity does not offer cryptocurrency investing. The company is also missing some features found on other investment platforms, like futures trading and paper trading, where you can practice trading.
By owning securities directly in an SMA, investors do not suffer from the embedded capital gains problem that mutual funds suffer. In addition, because SMAs are not bundled investments like an ETF or mutual fund, SMA investors can tax loss harvest on individual securities.
The Generally Accepted Accounting Principles (GAAP) basis classification divides funds into three fund categories: governmental, proprietary, and fiduciary.
Fund accounting is an accounting system that non-profit organisations (NPOs) and government agencies use to ensure the accurate expenditure of financial resources. It helps NPOs to maintain a record of fund allotment and ensure that organisations justify the utilisation of these funds.
A fund is an entity created to pool money from multiple investors—often referred to as limited partners. Each investor makes an investment in the fund by purchasing an interest in the fund entity, and the adviser uses that money to make investments on behalf of the fund.
The main advantage of the SMA is that it offers a smoothed line, less prone to whipsawing up and down in response to slight, temporary price swings back and forth. The SMA's weakness is that it is slower to respond to rapid price changes that often occur at market reversal points.
Why use a SMA?
With an SMA, your client has direct ownership in the securities held in the portfolio, this offers a number of advantages as opposed to investing in mutual funds and ETFs where all securities in the portfolio are pooled together.
In this context, an SMA can be thought of as an investment vehicle similar to a mutual fund, in which the customer pays a fee to a money manager for its services managing the customer's investment.
Separately managed account (SMA): an investment structure where the investor creates its own investment vehicle, then appoints a hedge fund manager as an investment advisor.
A Separately Managed Account (SMA) provides investors beneficial interest in a professionally constructed and managed portfolio of investments that may consist of Australian shares, listed securities (such as shares, ETFs, ETCs, LICs, etc.), managed funds and cash.
“The investments can differ for each investor. These actively managed accounts have their own fee structures that are more expensive than investing in mutual funds. Typically, these accounts require a minimum investment of $100,000.
