Douglas Goldstein: Hi, my name is Doug Goldstein. Thanks so much for joining me today. I am
going to be talking today about SMAs (separately managed accounts), perhaps you’ve heard
of them often called managed money accounts. The reason that I’m talking about it is
that in my capacity as an investment advisor and a financial planner, I probably help clients
to set up managed money accounts more than most any other investment that’s out there.
So today we’re going to talk about what they are and how they work and if you have
any questions at any point, please get in touch with me, you can go straight to our
website at www.profile-financial.com and just click on Contact Us.
A separately managed account and again when you use the term interchangeably with a managed
money account, it’s a managed investment account. Normally brokerage firms will offer
the services to their clients and what it is, is that let’s say that you have a certain
amount of money that you want to have managed in for example stocks or bonds or other types
of investments but you don’t want to deal with the day to day operations, so in the
old days, people use to hire a stock broker and the broker might trade for them but over
time people realized that that was not a terribly efficient way to do it, the results weren’t
terribly good, the brokers had lots of other clients they have to deal with and there is
no specific service that allowed you to get high level money management. Of course for
very, very wealthy individuals, there were possibilities to get money managers who focused
only on their accounts but that was only if you had a lot of money. In fact in those days,
the minimum investment could be half a million dollars, a million dollars or even more. Today,
the technology allows the same money managers, these money managers that are really institutional
level money managers that normally manage money for institutions, they could manage
portfolios for individuals who lets say have as little as $50,000.
So what sort of investments will you find in a managed money account? Probably the most
common would be what you see on the right side of the screen here stocks, bonds, mutual
funds and ETFs. ETFs stands for exchange traded funds. These are also type of mutual fund
but they just trade on a stock exchange. Other managers may specialized in a certain area.
For example, you might have a manager that buys RITs. RITs stands for real estate investment
trusts and maybe that’s their whole specialty. There are other money managers that may specialize
in alternative investments. These might be things like hedge funds or commodities or
futures or currencies. There are so many different possibilities of the types of investments
you’ll find but let’s today focused on some of the more basics, the managers that
deal in stocks, bonds, mutual funds and ETFs.
The main advantage to having an SMA, a separately managed account is that you actually own the
individual securities rather than holding them as a unit in a mutual fund. So there
are pros and cons to both of these but one of the main benefits of owning the individual
mutual funds yourself or the individual stocks or bonds inside the managed account has the
tax benefit that when you – the day that you go into the program an buy it, that’s
your cost basis and eventually when you sell it, that will be your sale price and you’ll
pay tax on that. Perhaps if you’ve owned mutual funds in the past, you’ve seen that
sometimes you buy a fund, the value of the fund goes down but at the end of the year,
you still get a message from the mutual fund that says that you need to pay tax on a capital
gain. And you say “Wait a second, I didn’t make any money” but what really happened
was that inside the mutual fund, the money managers were trading and some of the positions
might have been profitable, the day may have bought years before you ever even own the
fund and that can create a taxable event to you. So it’s nice having a managed money
account where each of the positions is something that you bought at your own time and you know
that if you sell it and hopefully there will be a profit, you’ll only be paying tax on
profits that you’ve made.
So that’s probably the main reason why it’s good in terms of tax management. There’s
also dividend. You can be in touch with your money manager to help try to express your
interest whether you’re looking for income, a lot of times the money managers might buy
bonds that will pay interest at certain times during the year or even high paying dividend
stocks could offer dividend at certain times of the year that are convenient for you. So
there is a certain level of customization which is available and a lot of people like
that.
Moreover, let’s say there are certain areas you don’t like, you don’t want to own
tobacco companies or you don’t want to own weapons manufacturers or let’s say that
you work for a major high-tech company and as part of your job there, you own stock options
or you have a lot of that company in your 401(k) plan or you’ve simply bought a lot
of stock in the company because you believe in it, you could go ahead and tell your money
manager not own a specific stock in your portfolio. That’s different from a mutual fund You
could never call up a mutual fund which is really a basket where there could be millions
or hundreds of millions or literally billions of dollars. You can’t call up the managers
and say “Hey listen, I work for XYZ company, would you mind not owning that in your portfolio
because I don’t want to be overweighed there. You would not be able to do that with a mutual
fund but with a separately managed account, you could and you could also choose managers
that have specific specialties of interest to you for example if you are looking for
investing in green energy or in pro-environment issues.
I think the reason that people like having money managers is because they know that the
money managers who are dealing with the day to day operations, they are professionals,
they are competing with each other to try to get the attention of your investment advisor.
I can tell you that as an investment advisor I have to look at many, many money managers
to find ones that are appropriate for my clients and I know that the money managers are doing
the very best they can because they know that if they don’t do a good job, I’m simply
going to look at the next one on the list. So I spend a lot of time than not having to
study the markets and watch every trade because it’s impossible as an individual advisor
to know everything going on but I can spend a lot more time with my clients to get to
know what their needs are, what their goals are, what’s their tolerance for risk. Do
you know how many times I’ve seen portfolios that people don’t even understand how much
risk they have in it. So I want to spend my time explaining that to clients and tailoring
their portfolio so that their overall big picture matches what they are trying to do
and then we use money managers to handle the actual trading especially for the riskier
side of the portfolio which in general would be the stocks.
So you have the benefit as a managed money client that you own the stocks in the portfolio.
There’s a major brokerage firm or bank that has the custodial responsibility, meaning
that they are actually holding the securities and they execute the trades and they’ll
send you their statements but you don’t really have to deal with any of that. It’s
all handled for you automatically. So let’s take a look at a few other factors that are
important for people. You may have noticed that the image reviews for this presentation
is a chess board because managed money is a very strategic way for people to handle
their money and I think it’s a very, very good comparison so if you’re a strategic
thinker and you like chess, you’ll probably like the way money managers handle the portfolios.
One of the main numbers you have to look at with a money manager is how they charge. There’s
the fee structure and it is different depending what brokerage firm you go to and what money
manager you work with. As a general rule, I think that money managers charge a percentage
of assets and they do not charge trading fees, so that you don’t have to worry if the manager
is buying and selling and buying and selling because that’s part of their strategy. You
don’t have to say “Oh my gosh! I’m probably paying a lot in commissions for this” because
you don’t pay any transaction fees in the account in most cases and the benefit f paying
a fixed percentage whether it’s 1 ½%, 2%, 2 ½%, it could be more or less than that
also, is that you know that the only way for the money managers to increase their income
is to increase the size of your portfolio. They will make more if the value of your account
goes up and similarly, they will make less if the value of your account goes down.
There are number of services that you can get with money managers. One of the biggest
one is this concept of blending, that the money managers and depending how big your
portfolio, you might actually choose more than one different money manager but they
can blend portfolios so that you’re not overweighed in one area. You might choose
a money manager that specializes in international investing and another one perhaps specializes
in large caps stocks, those would be stocks of big companies. And by looking at them together,
you can make sure that you don’t have overlapped and there are money managers who cover multiple
areas of the market, so with one money manager, you could have a very, very broadly diversified
portfolio. Now don’t forget, diversification is a great idea in investing but it is in
no way a guarantee of your principal, it just spreads out the risk and follows the advice
of your grandmother which is don’t put all your eggs in one basket.
One of the things you want to look for when you have an SMA, a separately managed account
is that you can have good online reporting. So ask your advisor what it is that you’ll
be able to see online. The nice thing of course is that you don’t have to watch the portfolio
everyday. You can just watch it from time to time but it’s great to be able to get
good online reporting. Also you may want to make sure that the setup of the SMA is appropriate
giving your tax situation. A lot of times accountants call me and say “Doug, I have
a client who’s got a tax issue and I think that a managed account would be appropriate
for him. So speak both to your financial advisor as well as to your tax advisor to make sure
that it’s an appropriate type of investment for you.
And then when you get it set up, make sure you understand the different parts. It’s
not so complicated but there are a few different areas that different professionals are handling
for you. The main contact you’ll have will be with your financial advisor or your investment
advisor and you’ll speak with him or with her and explain your interest and your goals
and then the financial advisor is going to find a money manager, it’s really a money
manager company. We often just use the term money manager but you shouldn’t think that
it’s some guy sitting in an office trading your account, these are normally major companies
that handle billions of dollars for major institutional clients as well and they will
also be able to handle your account as well.
So I think that when you’re looking for a tool to manage your portfolio, if you’re
not the type of person who likes to be involved in the day to day operations, consider using
money managers. Now it is true that, even today, there are people who like trading stocks
on their own and I’ve spoken with these clients and they insist that they prefer to
literally have their hands in the pot and to make all of the decisions themselves but
mostly I found that people have looked at the academic studies or we’ve discussed
the fact that when individuals trade their own portfolios, they tend to underperform
the market significantly. And I think therefore a managed money account is probably the best
tool that you can have for long-term investing when you want to have a broadly diversified
professionally managed portfolio.
Thanks so much for listening. If you have any further questions, please be in touch
with me. Again my name is Doug Goldstein, you can check out our website at www.profile-financial.com,
click on the Contact Us button if you have any further questions.