The Rise of SMAs
A separately managed account (SMA) is precisely what it sounds like: a portfolio of securities that is professionally managed independently of other portfolios. SMAs are popular among high-net-worth individuals and institutional investors seeking a more personalized and tailored approach to investment management.
One of the primary advantages of SMAs is the level of customization they offer. The advisor can adjust the portfolio’s asset allocation, security selection, and overall strategy to align with the investor’s specific financial goals.
SMAs are distinct from pooled vehicles such as mutual funds and exchange-traded funds (ETFs) in that each portfolio is tailored to one account. Other advantages include a flexible structure, tax efficiency, transparency, lower fees, and active management.
However, SMAs generally have higher minimum investment requirements, less oversight and fewer available options than mutual funds or ETFs, so they may not be suitable for all clients or circumstances. However, as an investor acquires more assets and develops more highly tailored goals and objectives, an SMA may be appropriate.
The idea of revisiting the potential of SMAs for financial advisors makes sense, given their longstanding presence in the investment landscape and the evolving needs of investors.
As interest in model portfolios declines, a growing number of financial advisors are turning to SMAs as a preferred investment vehicle for serving clients. While 27% of advisors expected to increase their usage of model portfolios in 2022, that figure fell to 22% in a new Cogent Syndicated poll of 403 registered financial advisors conducted by analytics and advising firm Escalent.
In addition, just 29% of advisors who use model portfolios reported increasing their use in the last year. Escalent attributed the shift to higher costs and underperformance, as well as increased desire for customization and more fund options.
“Despite expectations that advisor reliance on model portfolios would grow, we’re seeing a leveling off in adoption,” Meredith Lloyd Rice, vice president at Escalent said.
On the other hand, average allocations to SMAs are expected to reach 26% next year, compared to just 18% today, according to the report. Advisors who serve high-net-worth clients are expected to increase their average allocation to 31% in 2025, up from 23% in 2023.
The survey, which asked advisors with an active book of business of at least $5 million and who provide investment advisory or planning services to retail investors on a fee or transactional basis, was conducted between October and November of last year.
The recognition and development of SMA platforms by financial advisory stalwarts, such as AssetMark and LPL Financial, highlight the increasing importance and demand for bespoke portfolio strategies in the financial advisory space for today’s sophisticated investors.
SMA assets under management increased to about $1.8 trillion through 2021, while managed accounts, which include mutual fund advisory, ETF advisory, and unified managed accounts, totaled nearly $11 trillion, according to John Hancock Investment Management. As of 2022, the managed account industry is expected to grow at a rate of 21.4% during the following three years.
This growth is likely driven by factors such as increased demand for personalized investment strategies and the evolution of technology facilitating SMA management.
Aron Kershner, managing director at Goldman Sachs, highlighted the popularity of SMAs. He described them as uniquely positioned to serve “outcome-oriented” clients, whether they have philanthropic objectives, are looking to exit a non-performing equities manager, or are managing a highly concentrated stock position.
Over the next 10 years, baby boomers are projected to transfer over $30 trillion to their heirs, underscoring the significant intergenerational wealth transfer taking place today. Millennials and Gen-Z will benefit, and businesses that offer solutions that reflect their lifestyle will be a crucial factor in who they pick to handle their future wealth. SMAs can be an effective tool for financial advisors to serve them.