Separately Managed Accounts

There are two primary reasons to have a separately managed account: tax-efficiency and customization. Fixed income portfolios for high net worth individuals are ideal candidates for a Separate Account Manager. A good manager can add value for these clients through tax savings, lower transaction costs than a regular account, capturing inefficiencies in the bond market, and monitoring the portfolio against an appropriate benchmark to meet the objectives of the client. It would not be possible for an individual to manage his/her portfolio as tax-efficiently by purchasing individual securities or mutual funds.

Tax-Efficiency

Separately Managed Accounts (SMA’s) for larger taxable accounts can have significant tax benefits for some fixed income clients. Each client has a unique tax situation and an SMA can meet these needs better than a mutual fund or a brokerage account. Portfolios that own securities that are exempt from state taxes can be purchased in an SMA, but low fee mutual funds in states such as Arizona do not exist. During periods of rising rates, losses can be harvested in an SMA. This is not possible in a mutual fund. Can you imagine calling Vanguard and telling them that you want them to harvest $100,000 of losses in their $15 billion intermediate-term muni fund (VWITX)?

Customization

Fixed income money managers are also able to implement different strategies for investors or RIA’s that meet the needs of their clients. This may not be the case for a mutual fund. For example, what if you are concerned that stocks might tank and so you want to have a duration target of 7,8,10.0, etc? It is practically impossible to buy a fund that will fit any duration target that you would like to have. Most fixed income portfolio managers can do this relatively easily. Another example would be an endowment fund that doesn't want money invested in what they deem to be socially offensive industries. This may be difficult by using funds, because mutual fund companies such as Pimco, Fidelity, and Vanguard all invest in tobacco or brewing bonds.


Descriptions of these benefits are shown in the table below:

Some Separate Account Managers are not tax-efficient and do not build customized portfolios for their clients. We would not recommend working with these firms. If a portfolio is not tax-efficent and customized to meet the needs of the client why bother hiring a SAM? Why not invest in a mutual fund instead?