Tax efficiency is a requirement in any business arrangement. Financial managers and business owners strive to run an organization with an eye on the bottom-line- ensuring that stakeholders are satisfied

This is a motivation for business owners and investors in the industry, and it’s never wrong to strive for higher return of investment including lower taxes. The good news is that there are a diverse set of investing options that can deliver lower taxes and even higher returns. A perfect example of this investing option is called the separately managed account. This is now a favored investing direction for many who are looking for flexibility and better returns. And even though the starting investment is really high (and often reserved for moneyed investors), the promised lower taxes and better returns entice many interested investors.

Built-in tax advantage for SMA investors

This is different from the traditional mutual funds since the SMAs offer better tax advantages to its clients.  Since assets in SMAs are under the direct ownership of the individual investor, the investor can instruct the fund manager to unload specific securities to raise capital gains or limit loses. The strategy called tax harvesting intends to balance the losses and gains within a fiscal year, thus limiting the potential taxes on capital gains.

Individual ownership of stocks

Another difference is the fact that in SMAs, it is the investors who own the stocks compared to the arrangement in mutual funds where different individuals can own the stocks. Thanks to this kind of plan, the investor can request their financial managers to stay with specific stocks so that he can stay away from capital gain taxes, or even tell the financial manager to unload some of the shares of stocks in order to generate tax loss. This is not the case with traditional mutual funds where the capital gains are under the direction of the financial manager. In short, there is a flexibility given to the investor in maximizing the taxes for better profit and returns.

Managing the tax potential coupled with the ability to customize the package help make the SMAs as attractive investing options for individuals. Investors can choose the direction and the theme of the stocks, thus creating a portfolio that truly reflects investor philosophy. Investors can invest in technology or go for entertainment. The benefits of SMAs are obvious and can be seen in taxes but it can deliver more if the interested individual can work with a professional advisor.

If you’re looking for another investment vehicle that offers better flexibility, then an understanding of the separately managed accounts should form part of your investing education. These investment vehicles are also called wrap accounts and the current favorites of seasoned investors and an option for wealthy investors looking for alternative investment options. The leading investment firms and brokerages are now carrying and supporting these investments including industry leaders like Morgan Stanley, Merrill Lynch and UBS. So what makes the ‘wrap accounts’ click in the eyes of seasoned investors and business owners/

It’s all about customization — This is by far the strongest point of the wrap account, allowing investors to choose the stocks and avoid certain sectors. For example, you can focus your investments in technology, or you can even diversify by investing in food and beverage stocks. With customization comes a convenience that cannot be realized with other investing options. Managers can be assigned for value stocks, foreign bonds and other forms of stocks. These managers can manage your investment and tap into market-beating strategies. And when a certain manager failed on his job description in mitigating the losses or in bringing in the profits, the services of the manager can be terminated. And if the manager has been constantly beating the market, then his services can be retained.

Accessibility and exclusivity -These investment vehicles offer investors instant and convenient access to investments, making it easier to move investments from or into the fund as long as there are no changes in beneficial ownership. The movement of assets into an SMA from another investing portfolio will not involve capital events. Other investors will appreciate the exclusivity that comes with the fund. Since the initial investment is higher compared to other investing options, the individual investor is an exclusive company who desire a different way to invest. The exclusive arrangement can be a factor for investors who want premium attention and services for their investments.

These are the best reasons why the separately managed accounts are gaining traction in the industry. The minimum investment requirements may be high compared to others, but these investment options provide better flexibility, convenience and exclusivity.

In 2008, the financial industry particularly the hedge fund took a beating after a well-known financier and investor was charged for fraud. Now considered one of the largest Ponzi-based operations ever planned, the investment vehicle has managed to spoil the dreams of many investors who simply want to earn a huge return of investments at the expense of their lifetime savings. According to reports. the scam has managed to squeeze at least $65 billion of investors’ money. But for many individual investors, it isn’t just about the money earned but also the trust and confidence in hedge funds. With a diminished confidence in hedge funds, investors and consumers used the experience as motivation to find alternative investing options that offered a secure platform and investing environment. This is where the Separately Managed Accounts or SMAs come into the picture. Separately Managed Accounts provide conditions that the traditional investment vehicles cannot offer- transparency and control.

SMAs boost transparency and control

The fund also calls for the participation of a custodian (or multiple custodians) to complete the clearing and management of investments. Also, the asset manager is expected to collaborate with the investor to plan out a campaign or strategy that’s based on a personal investing strategy. To individual investors looking for a safety net in investing, the SMAs serve as promising investment vehicles which illustrate a critical investment principle- transparency and control are as important as the expected profit.

There was a time when Separately Managed Accounts or SMAs are only open for select investors with deep pockets and financial connections.  When this investment option was first introduced in the United States, the initial requirement was for investors to commit at least $500,000, an amount only high-net individuals can accommodate. Today, this investing vehicle has become more attractive to ordinary investors and entrepreneurs, with some companies requiring at least $5,000. Add the idea of having a diversified portfolio as an effective investment mantra, and you have the perfect recipe to draw new and inexperienced investors. But is it time to sign up and welcome SMAs into the fold?

What’s in it for you?

Compared with mutual funds, SMAs provide more flexibility in ownership and selection of stock composition. While investors contribute to a pool and own a share of the fund in mutual funds, the investor in SMAs takes ownership of the whole fund and can pre-select the investments in SMAs. This means that you have a leeway in managing the tax profile.

Also, there are a number of benefits associated with this investment scheme. For example, the securities in this investment account are portable and visible, as if the investor has personally chose and purchased the securities. This allows for customization, choosing what stocks to form part of the portfolio, or substituting a stock for the other.

A word about due diligence

Since SMAs are relatively new (at least for beginners) and may not publish registered prospectuses, individual investors and other interested individuals should conduct background checks to verify certain information. For example, it’s best to access and verify historical performance data and the philosophy and approach in investing of the financial manager. Each manager has his own investing style, and you may want to know his investing profile, whether passive or active.

At the core of investing philosophy is the ability of taking risks and trying uncharted investing territories. But of course, to make it happen, risks should be calculated and due diligence should be exercised- steps you can take if an SMA has become an attractive proposition for you.

While mutual funds have been the choice investment vehicles for many individual investors, the separately managed accounts or SMAs are starting to get traction in the market. So what make SMAs a different investment vehicle out there? For starters, SMAs are often positioned as an alternative for traditional mutual funds, and geared towards to the more ‘moneyed individuals and investors’. But aside from the cost of investment, there are other notable differences between mutual funds and separately managed accounts. There are two basic differences that an investor can realize when comparing these two investing vehicles- ownership and personalization.

Ownership — Both mutual funds and SMAs require an investment in a pool, and a finance or investment manager takes direct management of the fund’s growth and direction. The difference now lies in who and how much your share is in the collective fun. In traditional mutual funds, the money is fused with the cash invested by other investors. In mutual funds, it’s like buying into a share of the pie- the higher your investment, the higher your share. In SMAs, you directly own the securities, as represented by an assigned financial manager. Under the usual arrangement, the money you invest in SMAs will be placed in physical shares of identified stocks and other preferred investments, directly proportional to the cash investment. If you see the need to share the holding of a certain stock, it’s possible with SMA, which isn’t possible in a mutual fund.

Personalize based on risk profile — The ability to customize or select what stocks to maintain and sell is another stand-out difference. In mutual funds, you can select a mutual fund based on risk or growth profile, but you share common ownership on these stocks. But in SMAs, your portfolio is yours and unique in composition. You can work with the manager to take out some stocks in portfolio or add emerging stocks based on your market reading.

Separately managed accounts or SMAs serves as a creative and empowering investment alternative.  These investment vehicles may be new and requires higher initial investments, but it provides a different route that may be aligned with your financial capabilities and risk profile.

On July 23, 2014, a little over a week ago, the US Securities and Exchange Commission (SEC), in a 3-2 vote, approved the new money fund rules that are expected to affect both the asset managers and the investors.

The SEC said the new rule would help prevent a repeat of an investor exodus out of money-market mutual funds that threatened to freeze corporate lending during the 2008 financial crisis.

SEC Chairman Mary Jo White stressed that the rules are part of the reform package that would make the US financial system “more resilient” in times of stress as she gave companies two years to comply with the new restrictions. The SEC also hopes to ensure funds catering to both individual and institutional investors have tools to limit outflows.

Under the rules, prime money funds whose shares are held by corporations and large institutional investors will have to abandon a stable $1-a-share price and float in value like other mutual funds. Investors in these funds would risk losing principal if the share price fell. Prime funds invest in short-term corporate debt. Prime funds sold to individual investors can keep the $1 share price.

The rules also allow all money funds “to temporarily block investors from withdrawing cash in times of stress or allow the funds to impose fees for investors to redeem shares”.

Money funds are short-term instruments used by corporations, individual investors and municipalities to safely park cash.

Effect on Fund Managers

Fund managers have mixed reactions regarding the new SEC rule as one group said that though it ‘may question some aspects’ of the rule, they appreciate the new set of rules as “robust and meaningful”.

Some fund companies, like Fidelity, a Boston-based company which ranks as among the largest holders of institutional money fund assets, remain optimistic that the new rules will not cause clients or investors to immediately pull their money from the fund.

Another company said they were “generally pleased with the rule changes in part because they wouldnt greatly affect small investors”.

But most fund managers agree that companies have to undergo a total makeover in their “inner workings” because of the rules, which also require greater transparency and tighter restrictions on certain investments.

However, some companies expressed disappointment saying that the new rules would impose significant and costly daily operational burdens on money-market fund users.

One of two SEC commissioners Kara Stein who voted against the rule, said she feared the redemption restrictions would spark, rather than curb, investor flight from the funds in a crisis, a concern shared by some policy makers, including the presidents of all 12 Federal Reserve Banks.

Sheila Bair, a former head of the Federal Deposit Insurance Corp. said she is concerned the SECs approach is too limited to address systemic risk posed by the funds and that the new redemption limits could exacerbate it.

The Financial Stability Oversight Council however said it would review and examine the SECs new rules.