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Fee Structure for a million dollar portfolio?

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Oct 27, 2009 3:38 pm

Fred, within TradePMR can we charge....

under 25k - $35/m fee

over 25k - $1.5% or whatever.


Oct 29, 2009 1:58 am

what is SMA?

Oct 30, 2009 5:52 am
Shania Twain:

what is SMA?

Seperately Managed Accounts.   Basically it's an account that uses pooled money to buy assets. However unlike a Mutual Fund, the owner of the account actually owns the securities, not a fractional percentage of the pool. The account is professionally managed and tailored specifically to the individual who owns it.   Think of it like giving $500k to your favorite money manager to manage for you personally as he sees fit. He buys or sells securities on your behalf but discretionary authority as to virtually everything including asset class, price, timing, etc. He is paid via a fee based system rather than transactionally based.
Oct 30, 2009 5:01 pm
Shania Twain:

what is SMA?

  Ask Windy and Ron14.
Oct 30, 2009 5:36 pm

FWIW … I read an intriguing take on SMA from the owner of Cambridge Investment Research. His position: that by and large, SMA’s are the domain of the wirehouses and mostly because they can leverage them best and turn them into a profit center. Ultimately he suggested a competitive advantage of about 30-40 bps.

  Perhaps Fred will want to weigh in on that ...
Oct 30, 2009 5:58 pm

Theoretically they should be able to have a much higher competitive advantage than 40 bps. Professional money management tailored directly to the investor’s needs and without the handcuffing of a prospectus that you have to live by should enable greater returns potential.

  Most Money Managers indicate that as a Mutual Fund grows in assets it becomes harder to amass extreme returns due to the volume of shares needed to move in any direction. i.e. you can put in trade for 5k shares of XOM and have that executed immediately, but the execution timing and pricing diminishes if you are attempting to move say, 2 million shares.
Oct 30, 2009 6:02 pm

LSU is correct. Trading costs can be limited in an SMA, and if the manager is skilled, can result in quite a bit of return. Factor in taxes and the ability to take a tax loss in a non-qualified account, and you are looking at a significantly higher after-tax return.

Oct 30, 2009 6:25 pm

Not so sure SMA’s are for everyone.  I think they only make sense for certain types of investments.  They are not as nimbles as funds (you can’t just trade in and out of them), and it’s tough to get adequate diversification among all asset classes with the best managers, in the right proportions.  For example, if you want exposure to emerging markets, but you only want it for say 5% of a 500,000 portfolio, how realistic is that?  I could see using SMA’s for the core of a portfolio (bonds, large cap domestic and int’l, etc.), but for some of the “satellite” or niche classes, can you really get the best managers with SMA’s?  Some fo the returns I have seen with SMA’s are nothing impressive, so it sort of wipes out the tax/trading cost benefits over funds.

Of course, I don't use them much, so my experience is limited.
Oct 30, 2009 6:57 pm

I would respectfully disagree B24. They are far more nimble than MF’s because of the volume of trading that must be present to move the allocation of the fund. Diversification is not difficult when you have 500m in an account.

  Diversification is not having a little of everything. It's having a small piece of a few things that are not directly correlated. Having an equity position in Emerging Markets AND US Conglomerates isn't necessarily diversification due to the impact global demand has on most established large cap companies. Having a position in a non-elastic company like Kimberly-Clarke and one that is subject to elastic demand like say, Ford, would be diversification to some degree.   With 500k you can easily establish a diversified portfolio with a professional money manager.   Define 'best' money managers? Is one fund with a high sharpe ratio v. another with a low sharpe ratio better or worse? It's all subjective. SMA's allow for that.
Oct 30, 2009 7:21 pm

The main problem with SMAs are the wrap platforms.  Most firm’s Wrap trading desks are terrible.  You just don’t get that great of execution.  More of a nature of “system” then SMAs specifically.  Take international equities and bonds for instance - most wrap platforms can’t trade them, so you end up having to go with ETFs.

Nov 17, 2009 2:33 pm

[quote=Wet_Blanket]The main problem with SMAs are the wrap platforms.  Most firm’s Wrap trading desks are terrible.  You just don’t get that great of execution.  More of a nature of “system” then SMAs specifically.  Take international equities and bonds for instance - most wrap platforms can’t trade them, so you end up having to go with ETFs.[/quote]

I thought that SMA’s are independent of the wrap platform that’s why they’re separately managed so that we don’t have to trade them.  The other negative aspect of SMA’s in my opinion is the huge statements generated for the client.  Will he/she really look at these?  For less than a $5million account, I wouldn’t even consider it. 

I think that for a million dollar portfolio, price it at 1.25 or 1.5 then lower it as he/she brings in more money as a household or in referrals.

Nov 17, 2009 3:03 pm

Yeah, I have a different understanding of SMA’s as well.  We don’t “trade” SMA’s.  We “trade” in MFD/ETF wrap accounts, but that’s a whole different ball of wax.

  I agree, I find that SMA's are iniffecient for small accounts, and yes, produce tons of paper if you have several managers.  I recently took an SMA account(s) from SB, and my client had like 8 different managers.  His SB statement was like 40 pages long, and he had like 250 different positions.  Unfortunately they were all basically growth or growth/income equity managers, so the styles were very similar.  Didn't make much sense, especially since it was all in IRA money.
Nov 18, 2009 1:49 am

An SMA is an agreement between your custodian and a third party money manager in which the money manager has full rights to trade the money. they may execute the transactions either through your custodian or through their own institution and transfer it into your system.

I have seen some SMA integrations work flawlessly, others, have been bad.