The structure of SMAs has also changed such that multiple investment strategies can be included in a single SMA, rather than having to set up individual accounts for each strategy. This is often referred to as a Unified Managed Account (UMA). As a result of these advancements, individual investors are turning to SMAs to create customized portfolios. The SMA structure also supports robust tax planning, which can be meaningful for certain investor portfolios. As a result, RIAs have started offering SMA solutions to clients as a way of scaling their business while providing more tax-efficient and customized investments.
Customization for Better Goal Alignment
The rise of new investment approaches, including ESG, thematic investing and factor-based portfolios, has led some RIAs and investors to seek greater customization. ESG-focused investors may wish to screen out certain types of stocks so that the end portfolio is better aligned with their values. Factor-based investors may want to customize individual factor weightings relative to their investment goals. Thematic investors may only be interested in specific subsets of companies within the broader economy.
All of these desires put pressure on financial advisors to construct portfolios that contain more than a handful of market-cap-weighted mutual funds and ETFs. Within a separately managed account, investment professionals can create portfolios that reflect the desire for customization and provide a solution to the end investor without a significant increase in overhead. And, as investment fees have decreased and many trading costs move to zero, investors can align their portfolios as they see fit without layering in additional fees.
Robust Tax Management
The SMA structure allows for investment overlays that can improve portfolio outcomes for investors, specifically when it comes to tax management. SMAs offer two key tax advantages over commingled vehicles:
- Clients establish their own cost basis in each of the underlying holdings in an investment strategy.
- Decision making in each account can be customized based on the client’s tax situation.
Target COVID-19 Tax Issues
The benefits of a tax management overlay have become more pronounced as a result of COVID-19. In the near term, investors can use a tax management overlay to efficiently tax-loss harvest investment positions during periods of volatility, mitigating the taxable impact of capital gains elsewhere in the portfolio. Even if there aren’t gains to offset in 2020, these losses can be carried forward to future years to offset gains realized then. Should tax rates change as a result of federal budget concerns, having robust tax management in place now may help limit the potential negative impact of higher capital gains taxes or elevated tax rates in the future.
Against the backdrop of market uncertainty, separately managed accounts can be a solution for investors who are thinking through changes to their portfolio allocations and seeking greater customization and tax efficiency. For financial professionals, UMAs and SMAs can be convenient ways to address investor demand for customization and tax efficiency without taking on significant operational overhead. Technological improvements and low or no-cost trading make it relatively easy to offer the structure alongside other vehicles.
Natixis Advisors, L.P. does not provide tax or legal advice. Please consult with a tax or legal professional prior to making any investment decisions. This material is provided for informational purposes only and should not be construed as investment advice. There is no guarantee that objectives stated will be achieved. All securities are subject to risk, including possible loss of principal. Please read the risks associated with each investment prior to investing. Detailed discussions of each investment’s risks are included in Part 2A of each firm’s respective Form ADV. The investments highlighted in this presentation may be subject to certain additional risks. The above referenced entities are affiliates of Natixis Investment Managers, the holding company of a diverse lineup of specialized investment management and distribution entities worldwide. Their services and the products they manage are not available to all investors in all jurisdictions. Natixis Distribution, L.P. is a limited purpose broker-dealer and the distributor of various registered investment companies for which advisory services are provided by affiliates of Natixis Investment Managers.