Are SMAs the Future of Personalized Investing?

As the trend for customized investments continues, advisors will play an elevated role in helping clients integrate their preferences, goals, and values into one-of-a-kind portfolios.

Separately managed accounts for individual investors have been making industry news, with large investment firms developing their own SMA offerings or buying providers that have developed platforms for managing custom portfolios. 

Until recently SMAs—which allow investors to directly own global securities in a structure that is tailored to their needs in a flexible, scalable, personalized way—have been limited to institutions and individuals, with millions of dollars in liquid assets available to commit at inception. Advances in technology, however, have pushed the costs of investing down and now these vehicles are becoming available to a broader group of high-net-worth investors who can alter their portfolio mix to environmental, social and governance (ESG) issues; implement unique tax management strategies; exclude companies or industry sectors; and apply other considerations.

This investor expansion has had a significant effect. Last year, major wirehouses and broker-dealers managed an estimated $1.4 trillion in manager-traded or proprietary SMAs―up 17.3% from the year before and up 43.3% over the past two years, according to data from Cerulli Associates.

Although assets in mutual funds and exchange-traded funds still dwarf the current size of SMA assets, the growth seen in customized accounts offers a glimpse into a future of more personalized investing. Going forward, we see advisors having more interactions with clients and using greater precision to match strategies with each client’s unique needs and values becoming the norm in wealth management. 

Personalized investment strategies using mutual funds, ETFs, SMAs, and model portfolios have already become table stakes for asset managers and advisors across the industry. Consider the case of a client who inherits a highly appreciated, concentrated portfolio of stocks. She is tax-sensitive and concerned about minimizing capital gains in transitioning these assets to a less risky, diverse portfolio. SMAs present this investor and her advisor with greater flexibility in incorporating these shares as part of a diversified strategy—reducing buy orders in certain portions of the portfolio and back-filling the desired sector exposures with these holdings. The client avoids realizing capital gains by not having to sell the inherited positions and reduces concentration risk.

Questions often arise about whether mutual funds, ETFs or SMAs will be the wrapper of choice in the customized world we anticipate. The answer is not black and white, as each structure has features best suited for different investment objectives. For example, mutual funds and ETFs can earn securities lending revenues that can augment returns when passed on to shareholders. Mutual funds are priced at the end of each day, making valuations and recordkeeping straightforward. ETFs, on the other hand, easily trade intraday on an exchange and can have certain tax advantages. SMAs have more levers for portfolio customization. Given the varying advantages to each structure, all three should serve investors long into the future.

The explosion of new vehicles and methodologies offers a glimpse into the future of personalized wealth management, one in which qualified, experienced financial advisors play an even more important role in helping clients get the most from customized finance. Wealth managers will continue to face increasing demand in connecting purpose to portfolio when analyzing, recommending and tailoring unique strategies for a client. Extensive knowledge of investment structures and technical expertise in related subjects like tax efficiency, ESG integration and college planning will be a must.

In addition, pursuing deeper client relationships through discussions about charitable giving, retirement, generational planning, and other strategic wealth issues can help advisors truly understand each individual’s needs, values, and goals. Technology can better solidify these connections with clients.

As the lines between financial and life decisions become less distinct, investment professionals will become more intimately involved in coaching clients to better understand the challenges of money and make key decisions along their financial journey.

This essay originally ran in Barron's