SMAs

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Feb 11, 2010 1:58 pm

Is this all wirehouse producers use for accounts over $500K?

Feb 11, 2010 2:00 pm

Almost all Merrill accounts that we've moved over that are even over $250k are SMA's. 

Feb 11, 2010 2:18 pm

I hate SMAs...

 
Do all firms have access to the same SMAs? for example can a client at LPL and MSSB have the same SMA?
Feb 11, 2010 2:34 pm

So Alliance Bernstein is available at RJ, LPL and probably others..

 
Are you saying the SMA isn't the same? Or are you saying the fees for the SMA aren't the same? Or both?
Feb 11, 2010 2:56 pm

Why would I buy an SMA vs a mutual fund(i.e. Alliance Bernstein)

Feb 11, 2010 4:32 pm

Tax benefits on non-qualified accounts.  In an SMA you are buying each holding at their current price as opposed to buying a mutual fund and inheriting the cost basis from when the fund first bought each individual holding.

Feb 11, 2010 4:40 pm
chief123:

Why would I buy an SMA vs a mutual fund(i.e. Alliance Bernstein)

In addition to the tax effeciency, the more money you put in an SMA has an outcome on the expense ratio.  I read somewhere that once you get to about the $750K level, your expense ratio is more favorable than a mutual fund. 
Feb 11, 2010 4:53 pm
joelv72:
chief123:

Why would I buy an SMA vs a mutual fund(i.e. Alliance Bernstein)

In addition to the tax effeciency, the more money you put in an SMA has an outcome on the expense ratio.  I read somewhere that once you get to about the $750K level, your expense ratio is more favorable than a mutual fund. 
Is a client really gaining anything in tax efficiency when the averages all in fees on these things are 250bps?
Feb 11, 2010 5:00 pm
Squash1:

So Alliance Bernstein is available at RJ, LPL and probably others..

 
Are you saying the SMA isn't the same? Or are you saying the fees for the SMA aren't the same? Or both?
 
To give you an example, the firm I work for is on about 14 different SMA platforms (roughly).  We have three different strategies (all three aren't all every platform).  Platforms pay us different management fees, some platforms let us step out trades while others don't, some platforms trade certain securities while others don't.  Some platforms may be a single contract relationship while others are double.  Across all platforms, we are selling the same strategy, but due to platform characteristics - the performance can have some dispersion and different holdings.
Feb 11, 2010 5:08 pm
chief123:
joelv72:
chief123:

Why would I buy an SMA vs a mutual fund(i.e. Alliance Bernstein)

In addition to the tax effeciency, the more money you put in an SMA has an outcome on the expense ratio.  I read somewhere that once you get to about the $750K level, your expense ratio is more favorable than a mutual fund. 
Is a client really gaining anything in tax efficiency when the averages all in fees on these things are 250bps?

Show me how you got to that number....
Feb 11, 2010 5:35 pm
Wet_Blanket:
Squash1:

So Alliance Bernstein is available at RJ, LPL and probably others..

 
Are you saying the SMA isn't the same? Or are you saying the fees for the SMA aren't the same? Or both?
 
To give you an example, the firm I work for is on about 14 different SMA platforms (roughly).  We have three different strategies (all three aren't all every platform).  Platforms pay us different management fees, some platforms let us step out trades while others don't, some platforms trade certain securities while others don't.  Some platforms may be a single contract relationship while others are double.  Across all platforms, we are selling the same strategy, but due to platform characteristics - the performance can have some dispersion and different holdings.

 
For example I am looking at Neuberger Large Cap Growth( if RJ LPL ML has this SMA, will it be the same SMA manager holdings etc? or does Neuberger large cap growth SMA at RJ differ from that at ML?(without factoring in cost? Are the managers/holdings the same?)
 
(have a friend at RJ who gave me the performance of their individual SMAs)..
Feb 11, 2010 5:37 pm
joelv72:
chief123:
joelv72:
chief123:

Why would I buy an SMA vs a mutual fund(i.e. Alliance Bernstein)

In addition to the tax effeciency, the more money you put in an SMA has an outcome on the expense ratio.  I read somewhere that once you get to about the $750K level, your expense ratio is more favorable than a mutual fund. 
Is a client really gaining anything in tax efficiency when the averages all in fees on these things are 250bps?

Show me how you got to that number....


I am looking at my firms options.. for $200K in an equity strategy the fee is 3.00%
Feb 11, 2010 7:09 pm

you can do 1.75 all in @ most shops above 250k. Definitely cheaper than fund, tax efficiency blah blah blah.

Feb 11, 2010 7:38 pm
fredsac:

you can do 1.75 all in @ most shops above 250k. Definitely cheaper than fund, tax efficiency blah blah blah.


Are you including the SMA management fee in that, and the advisor fee?
Feb 11, 2010 7:51 pm

Most of the wrap fee includes the advisor fee and the SMA fee.  For example if we charge a client 2.25% on an international SMA, we will probably get 1.25%, my company will get .25% and the SMA will get .75%.  Or something like that.  And that's all the client pays.

 
If we do a regular wrap account, we can charge between 1%-1.5%, and if we do mostly actively managed funds (In these market conditions we are doing mostly active funds and a few closed end funds) then the expense ratio may average .75%-1.25% depending on the funds.  Right there the clients looking at 1.75%-2.75%, which is pretty similar to SMA's. 
Feb 11, 2010 7:53 pm
Squash1:
Wet_Blanket:
Squash1:

So Alliance Bernstein is available at RJ, LPL and probably others..

 
Are you saying the SMA isn't the same? Or are you saying the fees for the SMA aren't the same? Or both?
 
To give you an example, the firm I work for is on about 14 different SMA platforms (roughly).  We have three different strategies (all three aren't all every platform).  Platforms pay us different management fees, some platforms let us step out trades while others don't, some platforms trade certain securities while others don't.  Some platforms may be a single contract relationship while others are double.  Across all platforms, we are selling the same strategy, but due to platform characteristics - the performance can have some dispersion and different holdings.

 
For example I am looking at Neuberger Large Cap Growth( if RJ LPL ML has this SMA, will it be the same SMA manager holdings etc? or does Neuberger large cap growth SMA at RJ differ from that at ML?(without factoring in cost? Are the managers/holdings the same?)
 
(have a friend at RJ who gave me the performance of their individual SMAs)..
 
Yes, it will be roughly the same holdings.  There may be holdings in the account at RJ that are old, and for whatever reason Neuberger isn't buying it anymore and didn't sell it either.  Also, performance will vary from firm to firm for the same strategy for lots of reasons. 1) Neuberger may or may not have a trade rotation policy 2) RJ could be having their SMA trading desk trading the positions (SMA trading desks are usually subpar) 3) ML could restrict certain securities from the portfolio unlike RJ (think leveraged or inverse ETFs 4) RJ could have a mandated cash buffer and ML could not.  etc etc etc
 
But more than likely, a firm like Neuberger, the performance should be in line - ecspecially in a large cap strategy.  If it were small cap, the performance could have greater variance.
 
About Fees:  I've seen them range from 50 bps to 300 bps (isn't that awful?)  The highest margin the managers get are on UMA platforms.  This is because all we do is send a model.  We don't have to trade it, have to administer it, compliance is minimal - UMA clients are general not considered clients to the manager (for better or for worse).
Feb 11, 2010 7:59 pm

Benefits of SMAs that come off the top of my head (not saying they are the best).


1) Tax loss selling.
2) You know exactly what you own.
3) The manager invests to your objectives (in theory)
4) You can place more specific restrictions (if you care)
5) You can talk to the PM or a rep of the PM (depending on manager)
6) For the most part, no hidden fees.
7) Higher degree of fiduciary responsibility of the manager.
8) No ghost taxes
9) You can do a keep/sell when incepting an account.
10) You can rest comfortably knowing there is a dashing, handsome, witty Compliance Manager looking out FOR YOU.
11) You can maintain proxy voting rights for all your securities (if you care).
Feb 12, 2010 9:38 am

Bogles spin on fees is exactly what propelled Vanguard to it's lofty heights. He's had a good argument at times ie 1996-1999 when the S&P 500 index outperformed 80% of all actively managed equity. Over times of extreme volatility however, good management trumps fees. Management matters!

 
Fees are a much larger consideration when it comes to fixed income, but we can all find good equity funds that have whipped the S&P 500 over time- after fees. In terms of tax efficiency, there are many fund complexes such as Eaton Vance that have very good tax managed offerings.
 
I would argue many equity funds are a good purchase these days precisely because they have a ton of tax loss carryforwards that can offset future capital gains, thanks to the recent correction. For some investors, SMA's with fees approaching 3% could be better served in variable annuities with the same fees where you can offer guarantees not to mention the tax deferral.
 
Of course, distributions in non qualified accounts are taxed at the investors highest rate, but the ability to lock in an accounts highest daily value (Prudential HD products) could prove to be a wise choice when looking back in the future. It could also prove to be the worst choice when looking back in the future with the benefit of hindsight- you'll always find something that outperformed. Until we have the benefit of foresight however, we must do what we feel is in the best interest of the client, and we should be compensated for our service (as well as the fund managers) accordingly.
 
The do it yourselfers can stick with their Vanguard funds, pour gasoline all over themselves and light a match in the next market downturn because they have nowhere to turn for advice. Saving a couple of bucks in fees will ultimately cost them thousands. Sad. Bogle should be ashamed of himself.
 
Stok
Feb 12, 2010 10:16 am
mlgone:

I use Bogles argument on fees in MF to sell wrapped at accounts trading at NAV


I use it to sell ETFs...
Feb 12, 2010 10:37 am

I have FAILED to point out those exceptions...

My bad
 
Stok