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Cerulli Sees More Advisors Using SMAs

Advisor use of separately-managed accounts as standalone programs and part of unified managed accounts will soon exceed $2 trillion in assets, the research firm found.

The use of separately-managed accounts (SMAs) by financial advisors has steadily ticked up and Cerulli Associates, a research firm specializing in asset management and distribution trends, expects the assets collectively managed under these programs to surpass $2 trillion this year.

The volume of assets managed in SMAs is growing both for standalone programs as well as unified managed accounts (UMAs).  Assets in 2023 jumped 12% over 2022, according to Cerulli estimates, and is predicted to grow another 15% this year to top $2.2 trillion. UMAs allow wealth managers to combine separate accounts, mutual funds, and ETFs in one account, giving advisors a look across an entire portfolio to help find the best after-tax returns with tax loss harvesting.

“It’s focusing on personalization and customization of portfolios. That could be tax management or it could be for people saying, ‘I don’t want to own tobacco or guns in my holdings’ or I have too much Apple stock,” said Scott Smith, director of advice relationships for Cerulli. “The other factor is the increasing level of technology. When I started 26 years ago, an SMA with 20 positions would get 5,000 pieces of mail. Now that’s all gone digital and systems can handle these things. It’s a lot less burdensome from the portfolio management and tax management perspective. The other element is the growth of UMA programs, which are now the default vehicle.”

Managed accounts have slowly been replacing brokerage relationships for more than two decades, research shows. Among other reasons, fee-based accounts tie compensation to client portfolio values rather than trading commissions. 

“Fee-based relationships also come with the explicit mandate to provide ongoing fiduciary oversight of portfolios, which clients widely, but mistakenly, believe also is inherent in brokerage relationships,” according to a recent Cerulli research note. “Given these factors, wealth management providers have made increased adoption of fee-based managed accounts a core element of their strategic priorities.”

"The benefits of enhanced customization, control and transparency align very closely with the industry trend of investors demanding more personalized investment products and services," said Ryan Nauman, the market strategist with Zephyr, an investment management platform and SMA data provider (Zephyr and are both owned by Informa Plc.) 

Another factor that’s played into the growth of SMAs is that while they were once solely used by high-net-worth clients, because of the difficulty of managing portfolios with lots of holdings, technology has made that task easier, enabling advisors to offer SMAs to clients lower in the wealth tier, said Nauman.

The minimum on SMAs used to be in the millions. Now they are for clients with $500,000, according to Smith, and in some cases clients with taxable portfolios in excess of $100,000 or $200,000. “It makes more sense the higher you can go and the more you can offset the tax gains with losses.”

“If you have a loss in fixed income and a gain in equities, you can cross those losses over whereas in a standalone fixed income portfolio you wouldn’t know what equity was doing,” Smith said. “Advisors can look at an entire portfolio from above. They can look at what they would do to maximize overall returns.”

The use of SMAs initially focused on mutual funds, but now the use of UMAs allows for management of individual securities, mutual funds and exchange traded funds together.

They don’t work for alternative investments, however, because of the lack of liquidity that comes with those investments.

“These systems can flag losses across a portfolio, bringing in tax saving alpha as part of the proposition.” Smith said. “SMAs allow that better than other vehicles. Another part of the technology is using fractional shares. You can move investment minimums from $250,000 down to $100,000 or $50,000. And you can get your positions more precisely than if you were buying round lots or individual shares of a company.”

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