There was a time when Separately Managed Accounts or SMAs are only open for select investors with deep pockets and financial connections. When this investment option was first introduced in the United States, the initial requirement was for investors to commit at least $500,000, an amount only high-net individuals can accommodate. Today, this investing vehicle has become more attractive to ordinary investors and entrepreneurs, with some companies requiring at least $5,000. Add the idea of having a diversified portfolio as an effective investment mantra, and you have the perfect recipe to draw new and inexperienced investors. But is it time to sign up and welcome SMAs into the fold?
What’s in it for you?
Compared with mutual funds, SMAs provide more flexibility in ownership and selection of stock composition. While investors contribute to a pool and own a share of the fund in mutual funds, the investor in SMAs takes ownership of the whole fund and can pre-select the investments in SMAs. This means that you have a leeway in managing the tax profile.
Also, there are a number of benefits associated with this investment scheme. For example, the securities in this investment account are portable and visible, as if the investor has personally chose and purchased the securities. This allows for customization, choosing what stocks to form part of the portfolio, or substituting a stock for the other.
A word about due diligence
Since SMAs are relatively new (at least for beginners) and may not publish registered prospectuses, individual investors and other interested individuals should conduct background checks to verify certain information. For example, it’s best to access and verify historical performance data and the philosophy and approach in investing of the financial manager. Each manager has his own investing style, and you may want to know his investing profile, whether passive or active.
At the core of investing philosophy is the ability of taking risks and trying uncharted investing territories. But of course, to make it happen, risks should be calculated and due diligence should be exercised- steps you can take if an SMA has become an attractive proposition for you.