Do It Your Way

Tailor your portfolio with separately managed accounts.
Magazine Contributor
3 min read

This story appears in the March 2004 issue of Entrepreneur. Subscribe »

Mutual funds continue to struggle with image problems in the wake of a bear market and subsequent trading scandals. In the meantime, one investment alternative in particular has been coming on strong: separately managed accounts, or SMAs.

Catering to people with at least six-, but more likely seven-figure amounts to invest, assets in SMAs have bucked the bearish environment to grow at a 7 percent annual clip since 1999. Fund assets have slipped 3 percent per year over that time.

Sold by banks and brokerages (and, increasingly, fund companies), SMAs are one-stop shops that offer a gaggle of money managers under one roof, each specializing in a single asset category. The SMA takes your investment preferences, and the managers, in turn, create a portfolio of stocks, bonds and other securities based on your parameters. Each manager has a model portfolio, but he or she can adjust things based on your needs and wants. It's essentially a custom mutual fund.

Customization, though, does come at a cost. Expect to pay 1.5 to 3 percent in expenses for equity managers and maybe a little less for fixed-income money managers. Most mutual funds can be had for significantly less.

You do get several things in exchange for the higher fees, however-foremost among them, tax advantages. Mutual funds buy and sell securities all the time inside their portfolios, and investors have to pick up the tab for the capital gains generated. SMAs, on the other hand, give you flexibility to direct the buying and selling so you can manage the tax burden-offsetting gains against losses, for example. The accounts also make it easier to see what you own at any given time, allowing you to minimize "style drift," or overlap between portfolios.

Even so, you need plenty of tax savings to overcome the costs. Although you can invest in some SMAs with as little as $100,000, many advisors say the savings won't overcome the fees unless you have at least $1 million to put in the pot. If that doesn't give you pause, SMAs might be worth a look.

Merrill Lynch, Morgan Stanley, Prudential, Smith Barney, UBS and Wachovia manage the bulk of SMAs in the country, although other companies will surely emerge as the business grows. Morningstar, which for years has given star rankings to mutual funds, started doing the same for SMA providers late last year. It's probably a good idea to check the ratings out before you take the plunge.

Scott Bernard Nelson is an assistant business editor at The Oregonian and a freelance writer in Portland, Oregon.


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