What Are Separately Managed Accounts?

And Why Should a Catholic Investor Care?

The investment management world is divided between individual retail investors like you and professional or institutional investors. Not surprisingly, there are differences between the two in both the amount being invested and the way the investment portfolios are managed.

For the retail investor, besides actively creating and managing a portfolio yourself, there is a very large pool of traditional products to choose from. Many are designed specifically for those in the middle-income bracket. These are generally mutual funds and the minimum initial investment requirements have gone down substantially in recent years. Mutual funds offer investors an easy way to start and manage their portfolio, but there are significant drawbacks for Catholic investors, as explained in our article, 3 Awful Truths about Catholic Mutual Funds.

For institutional investors there are sophisticated, managed strategies with minimum investment requirements in the millions of dollars. These strategies have major advantages over those available to individual investors but the minimum investment threshold is so high very few individual investors can make use of them.

In between these two extremes of cheap mutual funds and ultra-expensive managed strategies is a growing universe of separately managed accounts or SMAs.

A Brief Definition of Separately Managed Accounts and How They Work

A separately managed account is a portfolio consisting of individual stocks that is created specifically for and owned solely by an individual investor with the guidance of a financial advisor and actively managed by a portfolio manager.

This means individual investors can get the same level of sophisticated portfolio management normally reserved for institutional investors without the prohibitively high account minimums. They are surprisingly easy to create. After meeting with your investment advisor, you simply open an investment account and fund it. Depending on your relationship with your advisor and how the advisory firm operates, the advisor may function as your portfolio manager or your advisor may help you choose outside portfolio managers. In either case, your portfolio manager will buy and sell stocks and other securities based on the objectives you and your financial advisor established to help you reach your financial goals.

Once your account is up and running, you will want to monitor the progress of your investment portfolio. You should determine if your portfolio manager is following the agreed upon strategy and whether your portfolio is progressing as expected towards your goals. Periodic meetings with your adviser and comprehensive quarterly statements keep you up to date with the whole process.

Mutual Funds vs. Separately Managed Accounts: A Few Key Differences

Both mutual funds and separately managed accounts are investment strategies that can help you achieve your financial goals. The way they work, however, are surprisingly different.

Ownership

A separately managed account is 100% funded by you and you own everything in it. It is YOUR investment portfolio and nobody else has any part of it. This is the exact opposite of a mutual fund. In a mutual fund, your money is put into a pool with other fund owners and you own shares of the mutual fund itself, which is the actual owner of the individual equities.

Security Selection

In a mutual fund, you have absolutely no say on what stocks, bonds, or any other securities are in the fund. You just buy shares in a fund that is created and managed by somebody else. A separately managed account is created under your specific direction. Your financial goals and needs form the basis for selecting the security holdings that will make up the portfolio. Depending on the individual manager and the size of the account, you may own anywhere from a few securities to several hundred in your separately managed account. If there are any companies that you refuse to invest in (or demand be included) in your portfolio, notify your financial advisor and they can be excluded from (or added to) it.

Transparency

If you invest in a mutual fund, you’re familiar with the black box statements they provide. The investment statement of a mutual fund investor shows a single-line entry bearing the mutual fund ticker, most likely a five-letter acronym ending in “X.” The dollar value will be the market value from the close of business on the statement’s effective date. That’s it. One lonely number represents everything that is in the fund and all the changes that have been taking place. For a SMA investor, each of the equity positions and values will be listed separately on their statement and the total value of the account will be the aggregate value of each of the individual positions. Note that if your SMA holds a mutual fund, the value of that fund will show up as a single figure.

Control

Decisions a mutual fund manager makes, including the timing of purchases and sales of shares, dividend reinvestment and distributions, affect all fund investors in the same way. Regardless of the number of shares you own or whether you agree with the manager’s decision or not, the value of your mutual fund portfolio will fluctuate based on what the manager does. For SMAs, however, the decisions are at the account level. Decisions and changes will vary for each investor. If one of the manager’s investors decides to sell all his shares, your account will be completely unaffected. The only decisions that will affect your account’s value are the ones your manager makes on your behalf for your account.

Mutual Funds Are Not for Everybody, Neither Are SMAs

Mutual funds and separately managed accounts are quite different. They both have their advantages and disadvantages, but both can provide a level of financial stability for most investors. Which of the two is better for your particular situation and goals is a conversation you should have with your financial advisor. Because separately managed accounts are relatively new to many investors, we’ll enumerate a few of the most important advantages and drawbacks they have for individuals.

Advantages for Individual Investors with SMA’s Include:

Peace of mind.

With a managed account an investor does not need to be concerned with the day-to-day management of a portfolio. They have hired a financial professional to do it for them.

Known cost.

Most of the firms that offer separately managed accounts charge a fee that is a percentage of the amount of assets under management. You know exactly what it will cost to have your account taken care of with absolutely no hidden fees. This arrangement actually gives the manager a very strong incentive to make your account perform better as it will directly increase the amount they get paid.

Tax issues.

As the account holder, you have some ability to manage your tax liability at year’s end. Unlike a mutual fund, you will not be liable for taxes on gains that you didn’t make (yes, owning shares in a mutual fund can mean you get taxed on money you didn’t actually earn).

Control.

If you buy shares in a mutual fund and then try to talk to the fund manager, you will learn pretty quickly that the manager works for the fund, not for you. There is almost zero chance that a fund manager will speak with an individual investor. With a separately managed account, you can easily get in contact with the people involved in managing your portfolio. Your SMA portfolio manager works for you which means you have the ability to make your wishes known and have your questions answered.

Fees.

Typically there are no additional commissions associated with your separately managed account. With some mutual fund transactions, you can actually be charged two separate fees for the same buy or sell order.

There also are characteristics of SMA’s that may be disadvantages for some investors. They include:

A higher cost of entry.

The minimum investment amount for separately managed accounts is significantly lower than what institutional investors face. But it’s still noticeably higher than what a mutual fund requires. While some managed programs have initial investment amounts of $10,000 per manager, certain strategies have considerably higher minimums. The best way to find out what the minimum is for a given manager is to contact them and ask. Sometimes, they may be willing to accept slightly less than their published minimums.

Picking the right manager.

There are thousands of investment managers out there and you need to pick which ones to use. Since they are the people who will be in charge of your investment portfolio, it’s quite important to find the right ones for your needs. While this is a difficult task, it is not really very different from picking the right mutual funds from among the thousands available.

Control.

Although it is your account, you are not actually running the portfolio. With a managed account you give up the ability to micromanage every single investment idea and must trust your manager. On the other hand, if you don’t want to manage the account or have a tendency to overreact to market fluctuations, this might actually be a benefit.

Contact.

Generally, your financial adviser/portfolio manager will not call you before every transaction. Again, though, if you don’t want to have anything to do with the day to day operations of your account, this can be a benefit.
Are managed accounts for everyone? Certainly not, but if you are one of the many investors who are tired of making decisions about individual investments, including which mutual funds to pick, or your portfolio has grown to the point where you are not comfortable managing it, or you want to turn the day-to-day management over to a professional, then using a SMA might be right for you.

So, What Does This Mean for Catholics?

Ultimately, we are called by God to be good stewards of the goods he has entrusted to us. In part, that means not engaging in or supporting objectively evil actions. This clearly extends to our investments. What answer can we make to the Lord if we purposefully invested in companies that provided abortions but offered a killer return? Or if we invested in them solely because we were too lazy to check what stocks were in a mutual fund?

Those who would answer that they will pick the stocks themselves are then faced with the incredibly complicated web of business relations that developed through years of mergers, acquisitions, takeovers and a host of other high-level corporate moves. Figuring out exactly who owns who and what they really do can be a full time job. It is very unlikely that most individual investors have the time to sift through corporate records to find out what stocks are morally acceptable options.

Enter the professional Catholic financial advisor. These investment professionals have made it their job to figure out what companies are and are not permissible options from a moral point of view. Often, they have contacts within the socially responsible investment community and may have access to information that is not publicly available. With this kind of professional at your side, you can begin to build a separately managed account that is 100% in line with your conscience and the USCCB’s socially responsible investing guidelines.

Additionally, if you would like to exclude other kinds of stocks, like those in the gambling or media industries, just tell your financial advisor. The portfolio manager can then create a customized account for you that follows all of these prohibitions. This is all possible through separately managed accounts. Remember, you own the account and you dictate the terms on which it should be created. All you need to do is work with your financial advisor to lay some ground rules and they will ensure your portfolio complies with your morals.

But prohibitions and exclusions are not the end of the Catholic way of investing. Instead, we must use our position as shareholders and, therefore, part owners of companies to promote the good of all. Active advocacy and engaging with corporate decision makers can and will bring the Light of Christ to all people. When selecting your financial advisor, be sure to ask if they also engage in advocacy initiatives as the USCCB guidelines demand.

Separately managed accounts are only one of a host of investment opportunities available today. While there are some disadvantages, there are numerous profound strengths that they offer all investors, particularly Catholics who want their investments to align with their faith. If you and your financial advisor have never discussed the possibility of owning a separately managed account in line with the USCCB guidelines, this is a conversation you should insist on having soon.

Contact Summit Investments today for a free consultation with our Catholic financial advisors on separately managed accounts.

Post from: Insights