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25.3.3 Separately Managed Accounts

A comprehensive guide to Separately Managed Accounts (SMAs) for Canadian investors. Understand the benefits, management structures, and roles of sub-advisors and overlay managers.

Introduction to Separately Managed Accounts (SMA)

As investors’ assets grow, so do their choices in investment programs. Depending on their needs, clients can opt for an external portfolio manager to control the investments held directly in their individual accounts. Instead of being held in a mutual fund or a pooled account, assets are held separately, which is why these accounts are often called Separately Managed Accounts (SMAs).

Key Features of SMAs

External Portfolio Manager

With this type of account, the external portfolio manager (called the sub-advisor) controls the holdings based on a portfolio model. As the sub-advisor makes investment decisions, the actual securities are debited and credited to the client’s dedicated account within the firm.

Tailored Investments

Because the client holds the underlying securities, the portfolio models can exclude investments or sectors in which the client prefers not to invest. Each investor’s distinct tax situation can be taken into consideration as well. Despite managing hundreds of client accounts, sub-advisors offer personalized management.

Advantages of SMAs

  • Access to Sophisticated Management: Clients get dedicated and sophisticated external portfolio managers.
  • Tailored Reports: Performance reports are specific to the investor, showing the performance of each separate account, including when securities are purchased and sold.
  • Direct Holdings: Clients directly interact with their investments, bypassing the pooled asset structure in mutual funds.

DID YOU KNOW?

Different investors have different views on the markets, with some wanting to hold and others wanting to sell. With SMAs, clients who want to hold avoid the risk of being forced to sell positions to meet the cash needs of other investors. Moreover, they avoid potential capital gain distributions for tax purposes.

Types of SMAs

SMAs can be either single-mandate or multi-mandate managed accounts (also called Unified Managed Accounts - UMA).

Single-Mandate SMAs

Single-mandate managed accounts are directed by a single portfolio manager or a team, focusing on sector-specific investments and optimal asset allocation. Clients can exclude certain securities for ethical, social, or other reasons, benefiting from personalized tax-loss selling.

Challenges:

  • When multiple investment objectives are required, separate accounts are needed.
  • Non-managed assets can’t be mixed within a single-mandate account.

Multi-Mandate Managed Accounts

In multi-mandate managed accounts, an overlay manager consolidates investments within a unified managed account, optimizing asset mix to mitigate risk while achieving investment objectives. It provides clients with broader product and service choices in one account and access to sophisticated institutional portfolio managers (sub-advisors).

Roles of the Overlay Manager

  • Due Diligence: Continuously review the performance of sub-advisors.
  • Asset Mix Optimization: Set optimal asset mix proportions to mitigate risk and maximize performance.
  • Ongoing Monitoring: Oversee client investments and overall portfolio composition, occasionally rebalance it.
  • Market Insights: Provide advisors with market insights and broader market perspectives.

DID YOU KNOW?

Professional oversight of multi-manager accounts gives high-net-worth clients greater confidence in their investment programs. Overlay managers do not work on referrals; they work in partnership with advisors, ensuring the clients’ investment aligns with their objectives.

Key Takeaways

  • Personalization and Customization: SMAs offer a high degree of customization, suiting individual client needs, risk preferences, and tax situations.
  • Expert Management: Clients have access to highly experienced portfolio managers and diverse investment strategies.
  • Direct Holdings: Unlike pooled funds, clients hold individual securities directly.
  • Transparency and Reporting: Aggregated and transparent performance reports.
  • Flexibility in Investment Mandates: Clients can tailor their investment portfolios through single or multi-mandate strategies.

Glossary

  • Separately Managed Accounts (SMAs): Investment accounts managed individually and separately from other clients’ accounts.
  • Sub-Advisor: An external portfolio manager making investment decisions in an SMA.
  • Overlay Manager: A key figure in multi-mandate accounts optimizing asset mixes and coordinating between different sub-advisors.
  • Unified Managed Account (UMA): A type of multi-mandate managed account consolidating various investment strategies and managed by multiple sub-advisors.

FAQs

What is a Separately Managed Account (SMA)?

An SMA is an investment account tailored specifically to an individual investor, managed by an external portfolio manager who makes investment decisions based on a customized portfolio model.

How does a multi-mandate managed account differ from a single-mandate SMA?

A multi-mandate managed account, or UMA, consolidates multiple investment strategies within a single account and employs various sub-advisors coordinated by an overlay manager. In contrast, a single-mandate SMA focuses on one investment strategy under one manager.

What are the primary benefits of SMAs?

SMA benefits include personalized investment strategies, access to top-tier portfolio managers, tax-efficient structures, and detailed performance reporting tailored to individual investors.

Can I exclude certain sectors or stocks in my SMA?

Yes, clients can instruct the portfolio manager to exclude specific investments or sectors for ethical, social, or other personal preferences.

Conclusion

Separately Managed Accounts (SMAs) offer customized, client-focused investment solutions, enabling affluent investors to leverage professional management and personalized strategies. With options for both single and multi-mandate structures, SMAs provide flexibility, transparency, and a robust alternative to pooled fund investments.


CSC® Exams Practice Questions

📚✨ CSC Exam Questions ✨📚

Welcome to the Knowledge Checkpoint! You'll find 10 carefully curated CSC exam practice questions designed to reinforce the key concepts covered. These questions will help you gauge your grasp of the material, identify areas that need further review, and ensure you're on the right track towards mastering the content for the Canadian Securities certification exams. Take your time, think critically, and use these quizzes as a tool to enhance your learning journey. 📘✨

Good luck!

## What is a Separately Managed Account (SMA)? - [ ] An account where assets are pooled together with other investors' assets - [ ] An account exclusively managed by the investor themselves - [x] An account where assets are held separately and managed by an external portfolio manager - [ ] An account that primarily focuses on short-term trading > **Explanation:** A Separately Managed Account (SMA) is an investment account where assets are held separately from others' assets and are managed by an external portfolio manager, also known as a sub-advisor. ## Who controls the holdings within a Separately Managed Account (SMA)? - [ ] The client themselves - [ ] The financial advisor - [ ] An automated trading system - [x] An external portfolio manager (sub-advisor) > **Explanation:** In an SMA, an external portfolio manager (sub-advisor) controls the holdings based on a portfolio model tailored to the client's preferences and needs. ## How do SMAs handle clients' distinct tax situations? - [ ] SMAs distribute gains and losses equally among all clients - [x] SMAs can consider each investor's specific tax situation when managing assets - [ ] SMAs do not consider tax situations at all - [ ] SMAs only adhere to general tax guidelines applicable to all clients > **Explanation:** SMAs can cater to clients' unique tax situations, allowing for customized management of gains and losses based on individual tax needs. ## Which feature allows clients to exclude certain investments in an SMA? - [ ] Portfolio mirroring - [ ] Automated trading exclusions - [x] Portfolio models tailored to individual preferences - [ ] Default sector exclusion > **Explanation:** Clients can customize SMAs by excluding specific investments or sectors, based on their individual preferences or ethical considerations. ## What is a key advantage of SMAs compared to mutual funds? - [ ] Higher transaction costs - [ ] Limited reporting on individual performance - [x] Direct holding of securities by the client - [ ] Less oversight by portfolio managers > **Explanation:** A key advantage of SMAs is that the client directly holds the securities, allowing for personalized control and reporting. ## What is a single-mandate separately managed account? - [ ] An account managed by multiple portfolio managers - [ ] An account with pooled assets - [ ] An account managed by the client - [x] An account directed by a single portfolio manager or team focused on specific mandates > **Explanation:** A single-mandate separately managed account is directed by a single portfolio manager or team, focusing on specific investment mandates without combining different strategies. ## What is the primary role of an overlay manager in a multi-mandate managed account? - [ ] To personally manage all client investments - [ ] To execute trade orders for clients - [x] To provide oversight and consolidate investments across portfolio managers - [ ] To handle client communications exclusively > **Explanation:** The overlay manager in a multi-mandate managed account oversees and consolidates the investments managed by various sub-advisors to ensure optimal asset mix and performance. ## How do multi-mandate managed accounts offer diversified investment strategies? - [ ] By investing only in a single asset class - [ ] Through passive investment techniques - [ ] By focusing on short-term trading exclusively - [x] By aligning each client with multiple portfolio models representing a diversified holdings mix > **Explanation:** Multi-mandate managed accounts align each client with multiple portfolio models, each representing a component of the client's diversified holdings. ## Why might a client prefer an SMA over a pooled investment fund? - [ ] To reduce management fees - [ ] To eliminate professional oversight - [x] To avoid forced selling due to other investors' cash needs - [ ] To receive less frequent performance reports > **Explanation:** Clients might prefer an SMA to avoid the risk of forced selling to meet other investors' cash needs, as this can lead to unwanted capital gain distributions for tax purposes. ## What are the fees for multi-manager accounts typically cover? - [ ] Only the underlying investment management - [ ] Only the custody and security transactions - [ ] Only the personal advisories from the financial advisor - [x] Underlying investment management, oversight by the overlay manager, custody, and wealth management aspects > **Explanation:** The fees for multi-manager accounts cover various aspects including underlying investment management, oversight by the overlay manager, custody, and comprehensive wealth management services.

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Sunday, July 21, 2024