How investors use Self-Managed Accounts

Photo of Angus Geddes, Fat Prophets By Angus Geddes, Fat Prophets

min read

Beneficial ownership of shares a key advantage over unit trusts.

A separately managed account (SMA) is a term commonly used within the investment management community and covers several different types of investor accounts.

An SMA is an open structure that enables the professional investment manager to apply several different investment mandates, giving the investor various options and strategies to choose from. SMAs are typically offered by stockbroking, financial planning and wealth management firms.

They will typically be a basket of 20 to 30 different stocks selected by the portfolio manager, which will be actively and professionally managed. The investment manager has discretion to buy and sell stocks, add new ones and change the weightings in the portfolio, while adhering to the product disclosure statement (PDS) and the mandate.

The typical structures of SMAs are usually the same, the key differentiators being the investment manager and the mandate applied. Therefore, the key decision for a retail investor is selection of the professional investment manager.

Investors will have many options to choose from as there are multiple professional investment managers on offer. The investor should carefully conduct due diligence, assessing factors such as how long the manager has been in the market and their past performance.

Each manager will also provide several different mandates which sit on top of the SMA structure. Each model will be tied to a specific benchmark for performance and models are available that focus on domestic as well as international shares. An SMA is an easy way for an investor to gain exposure to international markets and there are models that focus on capital growth or income.

Key features

All SMAs have different levels of risks and strategies, depending on the mandate and investments, which are covered in the Product Disclosure Statement. Investors should carefully study the PDS to acquaint themselves with the risks, mandate and fees.

The PDS will set out the minimum investment required to open an account, which typically starts at $25,000. You also need to consider that many SMAs are offered on a general advice basis, and therefore you should speak with your financial adviser before proceeding.

Each investment manager will typically use a different investment platform that houses the SMA. Once you open an SMA your investments will sit in this platform and you will have access to the account with a unique user name and password. The account can be accessed at any time to review the investments.

Different platforms provide different features and procedures for investing additional funds, withdrawing funds and reporting. Before opening an SMA, ensure that the SMA manager and platform suit your individual circumstances and requirements.

Key advantages

The SMA provides several advantages over a traditional managed fund. One of the key advantages is that the underlying assets are beneficially owned by the investor. Other advantages include:

  • The portfolio is professionally managed.
  • Investors receive dividends and franking credits.
  • Full transparency, as investors can view their shares and performance at any time.
  • Tax reporting and end of financial year tax statements.
  • Diversification through exposure to a larger number of shares in the portfolio than would be economic by directly investing a comparable sum.
  • Investors avoid the tax liabilities that may exist in unitised managed funds.
  • The tax position is unaffected by other investors, as an individual cost base is established for each investor,

The SMA will typically suit investors who:

  • Have limited time to manage share portfolios.
  • Lack the experience to choose shares suitable for their situation.
  • Seek diversification
  • Are older and no longer want the stress of managing portfolios.
  • Operate an SMSF (self-managed superannuation fund) or have an SMSF in the pension phase, because there are tax benefits in an SMA.
  • Want to take control of their retail superannuation.

With all investments there are risks. The SMA portfolio performance is dependent on the performance of the underlying investments in the selected portfolio. Investors should not take past performance of a model as an indication of future performance. General market and economic conditions that existed in the past could be different in the future and have significant impact on investment returns.

Annual management fees for the account may vary quite considerably depending on the manager, from 1.5 per cent to 4 per cent per annum, and this will be outlined in the PDS. In some cases, the manager may charge a performance fee.

An SMA can be an attractive investment option for retail investors. However, before investing, each investor should carry out their own research and appraisal of the investment manager, the models offered, fees and the PDS.

About the author

Angus Geddes is chief executive of Fat Prophets, a leading investment newsletter. Fat Prophets offers SMAs.
Follow on Twitter: @FATPROPHETS

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