Tax management and separately managed accounts (SMAs): Batteries not included

I think it is fair to say that most of us have had a similar experience in our childhood. You receive a present for your birthday or the holidays—like a remote-control car, a talking doll, or an electronic robot—and can’t wait to try it out. You get through all the layers of packaging, twist ties and tape. The excitement builds. But then you press the button. And nothing happens. You push the car and it moves forward. You move the arms and legs, but it isn’t doing the thing. The thing you were looking forward to it doing. You look at the box it came out of and read all the sides and find those three dreaded words: batteries not included

For many investors, this experience I just described is exactly how they end up feeling about their separately managed accounts (SMAs). Let me explain.

Features and benefits of SMAs

A separately managed account (SMA) is a powerful investment tool for many investors—and one that is growing in demand. This interest is driven by some key features and benefits of SMAs that may be unique in comparison to a pooled vehicle such as a mutual fund. For some, SMAs provide for a more real-world touch it and feel it experience. They like the direct ownership of securities. They want to be able to see their individual holdings and trades for psychological reasons. However, for many, the most powerful reasons for owning an SMA would be for its flexibility, higher level of customization and tax-management capabilities.

For example, as an investor, you may choose to invest in an SMA if:

  • You have a concentrated stock position with a low-cost basis. You might prefer to limit the annual capital gain taxation impact. With an SMA, you could build around that position and even transition out of it over a period of time while minimizing the total tax impact.
  • You are the owner of restricted stock or equity options in a company where you are employed. You might need or want to limit any additional ownership in that specific company as well as possibly the industry as a whole. With an SMA, you can restrict purchases to that stock and other stocks in that industry.
  • You have beliefs, either faith-based or strong personal preferences, that may either lean you toward or away from specific types of companies. Socially responsible investing (SRI) and environmental, social and governance (ESG) criteria are the two major categories this is referring to. An SMA can allow for these types of preferences and/or restrictions to be implemented.
  • You have a need for a higher level of tax management. This could come in the form of wanting and needing to limit the amount of taxable income generated by a portfolio each year. Or it could be the need to aggressively tax-loss harvest to offset investment gains generated elsewhere in your total household account.

While these are all great reasons for owning an SMA, there are some potential drawbacks.

These drawbacks relate to those missing batteries

You know what customization you need and want—whether it’s security restrictions, building around constraints and parameters, or higher-level tax management needs—but how do you make it happen?

It’s easier said than done

This is often where both financial advisors and investors run into challenges. Too frequently, needs, goals and parameters can’t be easily accommodated. The individual security restrictions may need to be entered in manually and then monitored often. Transitioning a portfolio may also need to be done manually by the financial advisor, with tools to help with this often being limited and rudimentary. Screens related to SRI or ESG preferences may wind up being negative exclusionary restriction lists rather than about positive portfolio construction toward a goal. And tax management may wind up occurring—as tends to be the industry norm—as a once-a-year, end-of-the-year after-thought rather than a frequent, systematic and opportunistic exercise.

Where are those batteries?!

The good news is, there is a better way. You can have what you want, but without all the heavy lifting, frequent monitoring and hands-on manual labor. Wait, but how?

It’s through partnership

With Russell Investments as your partner, you can have access to SMAs that offer the customization, flexibility and tax management you need, but ones that come packaged with batteries to seamlessly implement. It’s called Personalized Managed Accounts (PMA).

Things work better when the batteries ARE included

Through PMA, you have access to Russell Investments’ experience in portfolio implementation and tax-management.

By using PMA, a well-engineered, implemented and customized solution tapping into Russell Investments’ experience and expertise is within reach. Access to a truly advanced separate account solution through PMA allows you to:

  1. Potentially benefit from true professional institutional-level portfolio management.
  2. Customize it to your specific and unique needs, wants and investment goals.
  3. Achieve all of this while leveraging the Russell Investments partnership to implement it seamlessly and with little additional needed effort by the investor or the financial advisor.

The challenges of actually handling securities restrictions while managing an investment portfolio are handled. The adjustments needed to balance risk, investments, goals and after-tax returns—the potentially frequent and complex trading activity needed to bring it all back to balance—are handled. When it comes to tax management, this brings you much more than just a once-a-year, end-of-year flurry of manually entered trades. Year-round monitoring, tax management, opportunistic loss harvesting and much more is included within the PMA solution.

What’s more, partnering with Russell Investments can help financial advisors focus on what is most important

By leveraging a partner like Russell Investments to take on the implementation of wants, needs, goals and parameters that investors have, financial advisors can focus on what is most important: maintaining and strengthening their relationships with clients.

Financial advisors can listen to what the investor wants and needs from their SMAs without worrying about implementation stressWhether it’s high-level tax management, security or industry level restrictions, the need to transition a portfolio from point A to point B, or to manage to specific preference screens (SRI and/or ESG), by utilizing the experience of a trusted partner to fully implement, advisors and investors may sleep better at night.

Things work better when we do it together

Separately Managed Accounts can be a great option for a lot of investors with specific customization and tax-management needs. It just shouldn’t be as hard as it’s been in the past. Through partnership and with Personalized Managed Accounts (PMA), a higher level of customization and tax management can be accomplished. And, advisors will have more time to focus on building stronger relationships with clients and helping to achieve their desired goals.