The Separately Managed Account (SMA) is beginning too reinvent itself.
Most products in their life history evolve repackaging themselves to meet the demands of the marketplace. Take horse-drawn carriages, for instance, they evolved into gas guzzling SUVs with more horses under the hood than the buggy pulled by a single nag of many years past.
Most advisors are aware that the first level of the SMA offers a host of benefits for affluent investors, including the ability to minimize capital gains tax liability through tax gain/loss harvesting, customized portfolio holdings and a fee based pricing structure.
The SMA is also designed for individuals whose portfolios are serviced by professional money managers–top experts in their field specializing in specific asset classes.
One of the strengths of the SMA is having an investor’s assets managed by such name money managers. But the SMA’s strength can also be a negative especially for the next generation of retiring baby boomers who want it now and want it simple. They want convenience and attention.
Each asset class with the traditional separate account requires a separate money manager. This could mean a number of separate accounts, each with their own monthly statement, trade confirmations, and each with their own account minimums. See where “separate” comes in with “separate accounts”?
As you know, it works this way. With an SMA, the investor seeks to build a diversified asset management portfolio. Say he wants 50% equities and 50% fixed income. To construct this portfolio using separate accounts, the client with his advisor would have to open two separate accounts—one by a money manager specializing in equities and one specializing in fixed income. Not only would this increase his minimums (example: $100,000 per asset class) required to cover our simple model of only two asset classes but would generate increased reporting procedures and paperwork.
Because separate accounts are, well, separate, there probably would be little coordination between money managers. This could result in a duplication of holdings and could even result in one manager buying a certain security at the same time another manager is selling it.
Additionally, separate accounts include major assets in equities and bonds but are limited in the foreign market area and do not include financial strategy options like open ended funds and/or Exchange Traded Funds (ETFs).
Enter the third level of SMAs: The Unified Managed Account (UMA). It is a fully integrated asset management system providing comprehensive investment management in a single account. Remember the simplification and convenience factor I wrote about earlier. The UMA removes the need to have more than one account and combines all of the assets into one account with a single registration.
The UMA, having all the positive aspects of the traditional SMA –rebalanced regularly, tax liability reduced etc. but also can encompass most other investment vehicles (e.g. mutual funds, stocks, bonds, ETFs, hedge funds and more) in an investor’s portfolio—again… in one single account.
An UMA offers ease of administration for the client and the advisor. Each client will require one set of paperwork and all holdings will be summed up in a single performance report. Portfolio management decisions will be easy to coordinate and the account’s asset allocation will be easily identified and monitored.
Customization, a benefit of the traditional separate account, will allow the UMA the ability to incorporate all of a client’s assets into a customized asset allocation to create a diversified, tax-efficient account that offers systematic rebalancing and monthly checks to the client if needed.
The UMA will also eliminate duplication by traditional separate account managers. Overlay managers will oversee the UMA account, giving it an extra layer of management over the traditional standalone SMA.
Thus, the UMA, still in embryo stages but becoming an up and coming developing financial services product offering a substantial improvement in building assets for the right investor client. Many third party platforms (tamps) are either offering or soon will be offering UMAs as a way to attract assets under management (AUM) for their firms.
Boston-based consulting firm Cerruli Associates reports that from the fourth quarter of 2005 to fourth quarter 2006. UMA programs grew in assets by more than 37 percent.
“With the UMA, what we’re seeing is the separately managed account growing up,” says Steve Gresham, executive vice president at Phoenix Investment Partners, a money management firm in Hartford, Conn.
The advantages for the client and the advisor can be summed up:
• Simplified performance reporting and reduced paperwork
• Streamlined rebalancing, trading and automatic rebalancing
• Extensive asset classes and improved diversification
These three factors bundled together make it easier for the advisor to implement and monitor the client’s portfolio with the goal of enhancement of performance. Third party platforms will do all of the day-to-day management and reporting, freeing up the advisor to gather more assets and increase monthly passive income.
Of course, the client will receive the benefit of investing in commingled vehicles, which may be most advantageous for his or her financial strategy. The tax benefits offered by the traditional separate account will still be in place. Further, the UMA offers to the client a more reasonable fee structure over the traditional separate account-required minimums.
In summary, the UMA is rapidly becoming important in the SMA space. The reason: It’s what the clients over 50 with assets want: simplicity of managing stock market assets!

Six Solid Reasons to Stop Wasting Your Wealth in Mutual Funds

If you have $50,000 or more to invest, forget the passé (and wasteful)
investment strategy known as mutual funds. Financial expert and author Don F. Wilkinson explains why separately managed accounts, or SAMs, are superior in almost every way.

Chicago, IL—You’ve become disillusioned with mutual funds. Perhaps you’re a battle-scarred veteran of the 2000 downturn, having helplessly watched a robust portfolio dwindle to an anemic shadow of its former self. Or you’ve just entered the market and found that escalating fees and crushing tax bites are yielding sluggish returns (or worse, losses). Or maybe the greed and deception revealed by the 2003 scandals has left a lingering bad taste in your mouth. But if you don’t put your money in mutual funds, where can you put it? Is there a viable alternative?

Yes, indeed, says wealth manager Don F. Wilkinson. If you have as little as $50,000 dollars to invest, you can now join the ranks of the super-rich and divert your dollars into separately managed accounts, or SAMs.

“It’s been said that, ‘Mutual funds are the roadkill of American investing,’” asserts Wilkinson, author of Stop Wasting Your Wealth in Mutual Funds: Separately Managed Accounts—The Smart Alternative (Dearborn Trade Publishing, 2005, ISBN: 1-4195-2018-0, $19.95). “Eighty percent of funds yearly fail to match S&P. Don’t get me wrong; I used to steer my clients toward mutual funds, too. Not too long ago, we were all happy with them. But after the disaster of 2000 I started looking around for alternatives—and that’s when I discovered separate accounts.”

Separately managed accounts are individual baskets of stocks or bonds (as opposed to the “pooled assets” of mutual funds) that are actively managed by independent, institutional money managers. Previously used mainly by wealthy investors because of six-figure minimum balance requirements, separately managed accounts may now be opened with as little as $50,000. In fact, according to Wilkinson, more than 37 million U.S. households could qualify to open a separately managed account.

In Stop Wasting Your Wealth, Wilkinson provides:

• Point-by-point comparisons of SAMs to mutual funds, outlining risks,
  benefits, and returns
• A user-friendly process for opening, customizing, and switching to
  a separate account
• Ways to find advisors who handle separate accounts for clients

So what exactly are the benefits of pulling your money out of mutual funds and plowing it into SAMs? Wilkinson offers six off the top of his head:

You’ll probably see a higher ROI. Of course, the market is the market, and there are never any guarantees. But Wilkinson insists that separately managed accounts have the capability to significantly outperform mutual funds. “Mutual funds are less efficient because each fund is forced to carry high reserves anticipating redemptions from other nervous investors,” he explains. “The fund manager, therefore, has to juggle buying when the market is high and redeeming when the market is declining. This affects all investors in the fund and performance suffers. With the freedom from maintaining cash reserves and predictable flows from other investors not an issue, separate accounts have better potential for achieving better returns than mutual funds. This is especially true when separate accounts utilize the expertise of top grade money managers covering the progress of the portfolio.”

You’ll wrest more of your money away from Uncle Sam. Not only did the average fund experience performance losses in recent years, but investors got hit with taxes on capital gains—especially if they purchased a fund late in the year. In other words, a November buyer has to pay taxes on the same capital gains as investors who purchased in January. A separate accounts manager, on the other hand, can do “tax harvesting,” offsetting gains with losses to deliver a higher after-tax return than mutual funds. Since mutual funds usually record short-term capital gains, fund investors in the 39.6 percent federal tax bracket have to yield a gross of 16.56 percent to net 10 percent. SAM investors have to gross only 12.5 percent to net the same 10 percent.

You’ll say goodbye to hidden fees. When you invest in mutual funds, your expenses include loads, redemption fees, 12b-1 marketing fees, trading commissions, and soft dollars—all of which drive your fund expenses higher than is disclosed. With a SAM, you pay a flat yearly fee, usually between 1.5 percent and 3 percent of assets. “Separate account fees are based on a sliding scale,” explains Wilkinson. “The more money you initially put in the pot, the lower the fee percentage. With mutual funds, the annual expenses remain constant no matter how much cash you invest. In any event, the separate account offers a much clearer, less deceptive form of fee structure.”

Do the math. Multiple managers watching 50 or fewer securities is a much safer prospect than one manager watching 150 stocks. Separate accounts mean there are more people guarding the hen house. “With mutual funds, a single manager is responsible for watching hundreds of stocks,” says Wilkinson. “It is not humanly possible to do this and do it well. With separate accounts, managers are responsible for watching, say, 30-50 securities. In addition, each investor owns the securities in his or her account. This makes it easier to perform a re-balancing of specific securities to match market conditions. With mutual funds, this cannot happen.”

You can customize your own portfolio. “You may choose not to include any security in your portfolio for any number of economic or social reasons,” says Wilkinson. “For example, if you work at IBM, you might not want any of your own company stock included in your portfolio because you already have stock options with the company. You have the right to impose your values on your portfolio. If you say no to tobacco stocks, your money manager can eliminate tobacco companies from your basket of securities. In short, you may include or exclude securities based on your ethical, economic, or political views. This is usually not possible with a mutual fund.”

Let’s face it: personalized attention is just better. “Call it ‘the prestige factor,’ if you like,” says Wilkinson. “I prefer to simply call it smart investing. You can’t deny that having private money managers servicing your separate account is superior to casting your lot in with the masses and being viewed as a commodity. The knowledge that your portfolio is being managed by a private money manager alongside a Ford Foundation or a Bill Gates is a benefit that is hard to ignore.”
So if separate accounts are so much better than mutual funds, why do so many financial advisors continue to push the latter? That’s a good question, says Wilkinson. There could be many answers: laziness, fear of change, or ignorance of how SAMs work. Regardless, your first step in making the transition to SAMs is to ask your advisor about them.

“Don’t be shy,” urges Wilkinson. “Speak up. Just educate yourself first so that you can discuss the subject with confidence. Any financial advisor worth his or her salt will listen to your concerns about mutual funds and address them. And if he or she brushes off the whole subject of separate accounts, it may be time for a divorce. Quite simply, this is one of the most important asset management developments in a generation—don’t trust your financial destiny to anything less.”

# # #

About the Author:

Don F. Wilkinson, a 30-year veteran of the financial services industry, owns and operates a successful wealth management firm based in Newport Beach, California. His company oversees and consults on more than $500 million in separate accounts and handles estate planning for affluent individuals and their clients. Sought by broadcast and print media for his viewpoints, he has been featured on regional radio shows, has hosted his own radio show, Financial Strategies, and is frequently quoted by the Los Angeles Times and the Orange County Register.

About the Book:

Stop Wasting Your Wealth in Mutual Funds: Separately Managed Accounts—The Smart Alternative (Dearborn Trade Publishing, 2005, ISBN: 1-4195-2018-0, $19.95) is available at neighborhood and online booksellers or by calling (800) 245-2665.

Dearborn Trade Publishing, a Kaplan Professional Company, is the nation’s premier trainer and information provider for business and financial leaders committed to profiting from breakthrough ideas. Kaplan Professional provides licensing and continuing education training, certification, professional development courses, and compliance tracking for financial services, legal, IT, and real estate professionals and corporations. Kaplan Professional is a unit of Kaplan, Inc., a wholly owned subsidiary of The Washington Post Company (NYSE: WPO).

Hammered by the Mutual Fund “Double Whammy”?
Invest in a SAM—and Pay Less to Uncle Sam!

Want to decrease your total tax bill in 2007? Wealth manager Don F. Wilkinson
says to get out of mutual funds . . . and into separately managed accounts.

Chicago, IL — It happens every four to five years. Come tax time, mutual fund investors get hit with a “double whammy.” Because of the way mutual funds are bought and sold, it is all too possible to lose money on your investment and also have to pay significant capital gains taxes. Seems unfair, doesn’t it? Yet it happens all the time. (Tax year 2000, for instance.) Unfortunately, when you get your tax bill for 2005, you’ll see that it’s double whammy time again.

There is some good news, however. While you can’t avoid paying up this year, wealth manager Don F. Wilkinson says a great way to decrease your tax liability for 2006 and future years is to get out of mutual funds and into separately managed accounts (SAMs).

“Switching to a SAM can help you reduce your tax burden substantially over time,” says Wilkinson, author of Stop Wasting Your Wealth in Mutual Funds: Separately Managed Accounts—The Smart Alternative (Dearborn Trade Publishing, 2005, ISBN: 1-4195-2018-0, $19.95). “In fact, gaining more control over taxes is the number one reason investors are leaving mutual funds and moving to separate accounts.”

In case you don’t know, SAMs are individual baskets of stocks or bonds (as opposed to the “pooled assets” of mutual funds) that are actively managed by independent, institutional money managers. Previously used mainly by wealthy investors because of six-figure minimum balance requirements, separately managed accounts may now be opened with as little at $50,000.

How, exactly, does a SAM reduce your tax burden? Wilkinson offers three ways:

Lower turnover rates. “What continues to burden taxable investors is the breakneck speed with which fund managers buy and sell stocks,” he says. “The average yearly turnover of a U.S. stock fund is around 90 percent. Excessive trading generates high trading costs and capital gains. This, in turn, saps after-tax returns in mutual funds. By establishing a separate account, excessive trading that causes bounce-back tax bills will no longer be a concern. You own the stocks in your portfolio, and you’re in sync with your financial advisor and money manager, who can sell under-performing stocks on a systematic basis to offset capital gains.”

To boil it down to a simple formula:
…Less Turnover = Fewer Costs + Lower Taxes
…Fewer Costs + Lower Taxes = Higher Returns

Most managers hold stocks a minimum of a year and a day, whenever they can, to receive long-term capital gains tax rate of only 15 percent. In 2003, President Bush signed a bill into law that states that stock investments held for this period of time are subject to a significant tax rate deduction. (“Ordinary” tax rates on stocks can reach up into the higher 30 percentiles.) Mutual fund managers typically don’t hold stocks long enough to receive the lower rate.

Tax harvesting. Under the guidance of a skilled manager, SAM investors can take advantage of “tax harvesting”—realizing a gain and then taking a loss within your portfolio. This process (also known as “tax loss selling”) reduces the capital gains you built up during the year by selling securities as a capital loss. For many investors, it is the single most important area for reducing taxes now and in the future.

Paying less to the Tax Man is certainly a major benefit of SAM investing, but it’s not the only one. You’ll also avoid the hidden fees that come with mutual funds (you’ll pay a yearly flat fee instead), enjoy more personalized attention from managers, and be able to customize your own portfolio.

“Though there are never any rock-solid guarantees in the stock market, chances are great that you’ll enjoy a better ROI in separately managed accounts,” says Wilkinson. “Between taxes and hidden fees, staying in mutual funds can ultimately take a huge bite out of your taxable nest egg. My advice is this: if you’re cringing at your 2005 tax bill, and you will if you’re in mutual funds, consider switching to a SAM right away. Come April 15, 2007, you’ll be glad you did.”

Are Separately Managed Accounts a Smart Alternative for You?
Don Wilkinson Dispels Four Myths That Might Just Help You Decide.

You’ve probably heard some conflicting information lately about separately managed accounts. Wealth manager and author Don Wilkinson clears up some of the confusion.

Chicago, IL — Perhaps you’ve inherited a small nest egg and are seeking the best place to invest it. Or you’ve spent a couple of decades watching your IRA grow at a snail’s pace (an anemic snail) and you’d like to light a fire under it. Either way, you’re not 100 percent sold on mutual funds. Lately you’ve noticed a few news pieces about an investment vehicle called separately managed accounts , and reviews are mixed but positive for the most part. Frankly, you’re not even sure what SMAs are —but it would be nice to get some straight answers to help you decide if they’re a legitimate option for you.

Don Wilkinson understands your confusion. Indeed, his own book— Stop Wasting Your Wealth in Mutual Funds: Separately Managed Accounts—The Smart Alternative (Dearborn Trade Publishing, 2005, ISBN: 1-4195-2018-0, $19.95)—is one of the matches that have recently ignited a small media firestorm on the subject.

“There is a lot of misinformation about SMAs floating around,” asserts Wilkinson. “Much of it is due to the fact that the requirements for SMAs have changed. They’re suddenly available to a whole new market, but everyone hasn’t gotten the memo yet. And as much as I hate to say it, there are people out there who are wedded to the mutual fund industry who have their own reasons for discrediting alternatives.”

First things first: SMAs are individual baskets of stocks or bonds (as opposed to the “pooled assets” of mutual funds) that are actively managed by independent, institutional money managers. While they have been around for a long time, technological and other changes have recently made SMAs more accessible to mainstream investors, making them a viable alternative to mutual funds.

Wilkinson dispels four common myths about SMAs:

MYTH #1: Separate Accounts Are Only for the Rich.

REALITY: The SMA industry is currently being rediscovered by investors of more modest means. Due to technology and backroom advances, the bar of entry has been lowered. While it’s true that at one time SMAs had six-figure minimum balance requirements, some of today’s programs have $50,000 minimums. “Also, when you take into account the customized service SMA investors receive and the fact that fees are decreasing, this investment vehicle can end up being a smarter and less costly option than mutual funds,” asserts Wilkinson.

MYTH #2: Separate Accounts Cost Too Much.

REALITY: It just seems that way because investors pay flat fees on an ongoing basis. With SMAs there are no hidden charges like those built into mutual fund accounts. “When you take a close look at the numbers, it is more economical to be in separate accounts than in mutual funds,” says Wilkinson. “Because of expense ratios, usually around 1.5 percent, mutual funds are cutting themselves in on the total money whether it’s a good year or a bad year. Even if the stock market doesn’t go up at all over the course of the year, the mutual fund will still pay itself 1.5 percent of the assets within the fund. This, in my opinion, is making mutual funds more and more expensive for investors each year.”

MYTH #3: Separate Accounts Cause Tax Pain.

REALITY: Actually, the opposite is true. With SMAs you experience lower turnover rates, which mean fewer costs and lower taxes. Those factors combined will result in higher returns. Because most stocks are held a minimum of a year and a day, they meet the requirements of a law signed by President Bush in 2003 that gives stocks held for that period a significant tax rate deduction. SMA investors can also take advantage of “tax harvesting”—realizing a gain and then taking a loss within your portfolio. The process reduces the capital gains you built up during the year by selling securities as a capital loss. “Switching to an SMA can help reduce your tax burden substantially over time,” says Wilkinson. “In fact, gaining more control over taxes is the number one reason investors are leaving mutual funds and moving into separate accounts.”

MYTH #4: Separate Accounts Take Away Investor Decision-Making Power.

REALITY: By turning your money over to a professional manager, you may feel that your destiny is in his or her hands. But the truth is, SMAs give you far more control than the alternative. Mutual fund investors are subject to whatever their fund manager wants to do in regard to buying or selling securities because they own only shares of the stocks in their portfolios. “With SMAs, you’re the boss,” says Wilkinson. “The only money in your separate account is your own. SMAs offer the option to pick and choose the stocks and bonds that you want to invest in. You also choose the money manager you want to be in charge of your account. The bottom line is that SMA investors have far more control and far more input into their financial destiny than mutual fund investors.”

Of course, the bottom line in making such a decision is, well . . . the bottom line . Results. Do SMAs perform better than mutual funds? Wilkinson says, generally, yes. While there are never any guarantees in the market, there are many logical reasons to believe that separate accounts have an edge.

“This is especially true in the volatile market we have experienced since 2000,” he says. “During this period, the average mutual fund lost value and distributed 9 percent average in capital gains. This brought it home to high net worth investors that mutual funds are less efficient because each fund is forced to carry high reserves anticipating redemptions from other nervous investors. The fund manager, therefore, has to juggle buying when the market is high and redeeming when the market is declining. This affects all investors in the fund and performance suffers.

“With the freedom from maintaining cash reserves and predictable flows from other investors not an issue, separate accounts have better potential for achieving better returns,” Wilkinson adds. “It’s common sense. Mutual funds are for people who have less than $50,000 to invest in the market. My advice is this: Instead of being swayed by naysayers, thoroughly educate yourself on both options and make the decision that feels right. It’s your money—so you should have the final word.”