If you’re lucky enough to have millions to invest you can approach a fund manager directly and ask them to personally trade your money for you. No longer will you be shoved into a fund with everyone else – instead, a fund manager will treat your account separately.
This idea of having a separate account is appealing to many. And as computer software advances, the concept of separately managed accounts (SMAs) is taking hold and not just with the nation’s millionaires.
It’s easy to get confused about managed accounts because stockbrokers, fund managers, private banks and even financial planners offer them, but in different guises. Essentially, they’re investment portfolios managed for you and held in your name. The portfolio might hold shares, fixed interest securities, property trusts, exchange traded funds or a combination of all.
The commonsense characteristics of SMAs certainly highlight the inherent flaws in traditional unit trusts. For starters, most SMAs provide online access to your account, enabling you to view all securities that you hold on a daily basis (it’s near impossible to source equivalent information from a unit trust).
But more importantly are the tax advantages of a SMA compared to a unit trust. Since your account is separately managed, you are spared the tax impact of other members’ buying and selling activities. You cannot inherit a capital gains tax liability when you buy into the portfolio. And the good news for anyone who’s received a tax bill on a negatively performing unit trust is that this doesn’t happen in a SMA.
It’s important to realise that while technology has allowed SMAs to be offered to smaller investors, the degree of customisation is considerably lower for smaller accounts than large multi-million dollar portfolios. Cheaper off-the-shelf SMAs offer “model portfolios”, which in other words means, receiving the same investment portfolio as everyone else. The difference, of course, is that your account is separated from others for tax purposes.
More sophisticated managed accounts, often referred to as individually managed accounts (IMAs), provide considerably more flexibility but are generally restricted to large portfolios in the $200,000 plus range. An IMA, for example, might allow you to screen out tobacco stocks, or only sell shares eligible to receive the 50 per cent capital gains tax discount.
The biggest hurdle for SMA providers is encouraging financial advisers to adopt them. Most advisers in Australia are hooked on managed funds as master trusts and wraps dictate the breadth of products that advisers offer their clients. Since SMAs don’t appear on the majority of platforms, many advisers don’t even know they exist.