Financial advisers are investing in droves in Separately Managed Accounts, or SMAs. We take a look at the benefits of this investment product, and why more and more advisers are joining its church.

You can read the full article from Shani here.

You can find the transcript for the episode below:

Shani Jayamanne: For the past five years, we’ve released a weekly podcast to arm you with the tools to invest successfully. We’ve always strived to provide independent, thoughtful analysis backed by the work of hundreds of researchers and professionals at Morningstar.

Mark LaMonica: We’ve shared our journeys, and you’ve shared back. We’ve listened to what you’re after and created a companion for your investing journey - Invest Your Way. Invest Your Way is a book that focuses on the investor instead of the investments. It’s a guide to successful investing with actionable insights and practical applications.

Jayamanne: You’re able to pre-order the book through the links in the episode description.

LaMonica: Thank you for your continued support and we look forward to helping you invest your way.

Jayamanne: Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature. It does not take into consideration your personal situation, circumstances or needs.

LaMonica: Shani, we’re going to talk about, and we’ve talked on this podcast before about all of these awards that you’ve nominated for, and you win.

Jayamanne: I don’t know where this is going.

LaMonica: We are going to talk about the first award that you got at Morningstar.

Jayamanne: Okay.

LaMonica: So, would you like me to set the scene?

Jayamanne: Sure. I still don’t know where this is going yet.

LaMonica: You had started maybe two weeks before.

Jayamanne: Oh, no, I know. Okay.

LaMonica: And you were on a different team.

Jayamanne: Yes.

LaMonica: But we were having a group meeting, and you were hired specifically to work on a different product at Morningstar. And I knew that we were having a meeting to shut down the product that you were working on. But before we got into that – you know, the key part of the meeting, I had to present you with an award.

Jayamanne: Yes. For my two weeks of work.

LaMonica: Yes. But apparently, you made a really good impression. I had to give you a card. And I didn’t really know you at all. So, I gave you this card. I assume you were probably happy about this. You just started this new job. You’re already recognized. And then 30 seconds after that happened, what happened?

Jayamanne: The product shut down. Well, the thing was we were in this team meeting and our managing director was in there and the head of HR was there. And I was like, wow, this is such a great place to work that they take such an interest in monthly team meetings. But then they told me that the product had shut down. But I came to Morningstar to work with individual investors. And after a short detour after this product was closed, here I am again.

LaMonica: Yes, that is true. But this does have relevance to today’s episode.

Jayamanne: It does.

LaMonica: I was not just telling the story. Why don’t you talk a little bit about what that relevance is? What was the product?

Jayamanne: So, I was working in a completely different job where I was working on a product that allowed individual investors to invest in separately managed accounts or SMAs.

LaMonica: Yes. And that puts you in a very good position to talk about a separately managed account. Some listeners will probably be familiar with them. Some won’t. But during this two-week period, and you obviously knew about these before, why don’t you talk a little bit about what a separately managed account is? How investors should think about it? The advantages, the disadvantages, I guess that’s the whole episode. But start us off with what is an SMA. Why are they so popular right now? And why are so many financial advisors adopting them?

Jayamanne: Yeah. And if you have a financial advisor or you’ve used one in the past, you’ll likely find yourself investing through an SMA or a separately managed account. Investment Trends Research shows that three in five Aussie advisors use managed accounts with 71% of their clients’ total assets in these accounts.

LaMonica: So, they are very popular with financial advisors. The only thing is I think the market for SMAs in Australia for any self-advised or self-directed investors is just starting out. And so, we are seeing some providers come out there opening up a direct-to-consumer channel. So, it might be something self-directed investors are hearing more about.

Jayamanne: And I think part of this is something that I experienced. So, when I was working on this product and speaking to individual investors about it, it took a really long time to explain how they work and the type of investor that they suit. And the investment industry has definitely evolved since then and financial knowledge has generally broadened for investors. So, I think it might be a little bit easier today, but it was a hard product to explain to investors.

LaMonica: And we’re going to do that. We’re going to explain it to investors during this podcast.

Jayamanne: And another place that they’re really popular, Mark, apart from with financial advisors in Australia is in the US. So, do you want to explain why?

LaMonica: Well, I think what we saw happen during the Global Financial Crisis is a lot of investors got burned by other investors. And really this is a problem for products like managed funds or mutual funds, as we call them in the US, where the actions of other investors can actually impact your returns. And I think a lot of people don’t know this. So, if an investor pulls out of a fund, you essentially, if you’re still in that fund, you inherit their tax consequences. And unsurprisingly, investors don’t like that.

Jayamanne: And like the investment product industry likes to do, they like to create products that solve issues and attract as much investor cash as possible. And SMAs were a solution to this. There was a huge uptick in SMA adoption after the GFC. You see a graph of this and it’s like a hockey stick to the sky. And we’ll go into why.

LaMonica: Okay. Let’s look at how they are structured, because it explains why it solves that issue for investors and why it’s actually appealing, increasingly appealing for a lot of people. So, an SMA allows investors to beneficially own every security in their portfolio. So, what does this mean? Why don’t you go through maybe a comparison that can help people understand this?

Jayamanne: So, compare it to a vehicle like an ETF or a managed fund where you’re holding units in a vehicle that owns the assets, but you don’t have ownership over those individual securities. So, for example, if you want exposure to the ASX 200, you can buy an ETF like the SPDR S&P/ASX 200 ETF with the ticker symbol STW, which owns the underlying shares in the index. Or you can buy an SMA, which directly provides you with beneficial ownership of those 200 shares individually.

LaMonica: Holding your investment in this way gives you a few advantages and much more flexibility. One of the ways it allows you to do this is by excluding certain stocks or securities.

Jayamanne: Exactly, Mark. So, because you own each underlying security, you can sell them. There are a few common instances in which an investor would want to do this. So, a common problem in Australia is that you have huge exposure to two industries. You might decide that you want to reduce your exposure to mining and you’re able to do that.

LaMonica: Another instance is you might have some sort of ethical reason that you don’t want to own a mining share, for example. So SMAs will let you sell out of those assets.

Jayamanne: And I just want to touch on the tax consequences from the actions of other investors just one more time because I think this is quite important for investors. And I think we all know that with managed funds, it can force the hand of fund managers if a group of investors decide to do something. So, if too much money is pulled from a fund, the manager will have to sell to meet outflows. This generates capital gains. With an SMA, you really do have greater control over those tax consequences.

LaMonica: And the benefits actually extend a little beyond that, Shani. And so, again, as we explained, when you own an ETF or a manage fund, you own units in that vehicle. The basket of shares that the ETF or fund represents need to all be sold or all be retained. The tax consequences are based on the vehicle and not the underlying shares. And that means you can make decisions that could reduce your tax obligations.

Jayamanne: So, let’s explain what Mark means by this because it can seem quite nebulous. So, for example, you have a portfolio of three shares. They have different weightings in the portfolio, and they have different returns. Share A could be 40% of the portfolio and have a 7% return. Share B could have a 20% weighting and a 5% return. And we’ll keep this quite high level because it’s really hard to do this over audio format, but you can find an example in an article that I’ve written that’s in the episode notes. But the portfolio overall could achieve a 3% return, but each individual asset has had a different return to that. If you had a managed fund or ETF, you’d have a 3% gain if you sold all or part of that investment. For SMAs, you can decide which assets you buy and sell. So, you could sell an asset that’s incurred a capital loss and offset it against other realized gains.

LaMonica: And this feature is really important. Across portfolios with large balances, this can make a meaningful difference because it just gives you all of these options where you can manage your taxes and come up with your own tax strategy.

Jayamanne: And SMAs are really great for transparency as well. SMAs allow you to see what you’re holding and the exact quantity in which you hold it. This is especially attractive for investors in Australia where it’s not mandated to show full holdings for managed funds. Mark, take the stage. I know you love talking about this.

LaMonica: I do this seemingly every week, Shani, but we both think, I guess especially me, since I’m the designated runner, we do think that transparency into holdings in anything you buy is not optional. So, it is hard to believe, obviously, in 2025 that you still don’t have transparency into funds in Australia. It’s strange that fund managers are not just doing this on their own, but yes, that is an advantage of SMAs. And having this transparency into every single asset that you own, we think is important. And if you think it’s important, an SMA is an option where you can do this.

Jayamanne: All right. So, let’s move on to reporting. And reporting isn’t the sexiest feature. But in a recent Vanguard study, it showed that one of the major reasons that advised clients outperformed unadvised clients is the tools and software that give investors an analytical edge. So detailed attribution and tax analysis is available through these platforms.

LaMonica: There are a lot of features, but I think the important question to ask is why advisors are getting more and more clients invested in these products and in larger quantities. So why do they love SMAs, Shani?

Jayamanne: I think it’s a lot of the reasons that we outlined, but they also utilize a similar solution called individual managed accounts or IMAs for clients with larger balances. And they provide the ability to have a personalized investment strategy with complete control of the individual securities in a relatively cost-effective manner.

LaMonica: And I think importantly for advisors, it makes their life easier. So, these platforms allow them to make changes that will apply across a variety of clients. They decide to remove an equity from a portfolio. They can do this across their whole client book.

Jayamanne: So, let’s turn to the research and see what advisors are actually saying about why they are turning to SMAs. There’s three top reasons – the ability to achieve full asset allocation through managed accounts, so that’s the ability to access multi-asset models; availability of managed accounts on more platforms; and ease of setting up managing their own managed accounts.

LaMonica: I think we need to be a little cynical here.

Jayamanne: We’re both very cynical people. So, this isn’t going to be hard.

LaMonica: Yes, in general. So, another perspective, a more cynical perspective on why advisors like SMAs and IMAs is because it makes clients stickier. Getting your client into a product where you have to actively manage and adjust the individual securities means that a client is more likely to stay with an advisor. If a client is in an advisor’s own portfolio, discontinuing the service means that the portfolio usually remains stagnant with no further changes being made to this unmonitored portfolio. On the SMA side, the fact that many investors are unfamiliar with SMAs provides additional incentives to stick with that advisor.

Jayamanne: All right. So that’s a lot about advisors and advised clients. What type of investors do they actually suit? They’re just like any other investment product where they may suit one more than the other based on their features, their fees, and their operations.

LaMonica: Well, an SMA is more likely to suit an investor with higher balances. This is because you do not own units in an investment trust like ETFs and funds. You directly own the security. So those tax efficiency benefits that we’re talking about and the ability to customize only really become noticeable when they’re scale and scale meaning you have a lot of money. On the tax efficiency side, the benefits obviously disproportionately help investors in higher tax brackets because it’s worth more to you to have this customization to actually save taxes because you’re paying more taxes.

Jayamanne: And SMAs also suit investors that place a greater value on transparency and control. You get to decide what you own and the exposure you have to the asset. This may be particularly suitable for investors that want to exclude investments from their portfolio for strategic or for impact reasons. And for impact reasons, I mean ESG mainly.

LaMonica: Exactly. And we did mention that before. So, there’s lots of different options to tailor those ESG or impact options than with managed funds or ETFs because the issue with these off-the-shelf ESG products is once again, this lack of transparency as we talked about. And what constitutes ESG is different from product to product. So especially with something as individual as what you or I may deem ethical, it is nice to have that control. And that’s what SMAs allow because they can be customized.

Jayamanne: Okay, let’s move on to one of the most important considerations for an investment product. How much does an SMA cost?

LaMonica: And Shani says this is the most important or one of the most important considerations because of course, it’s one of the largest determinants of those total returns that you receive. Keeping your fees low mean that you will maximize your returns.

Jayamanne: But this doesn’t mean that you should always just invest in the cheapest product every time. There’s going to be some investors that SMAs that are going to suit where the benefits outweigh the costs, particularly with tax efficiency.

LaMonica: Now you reference an article you wrote, Shani. So, in that article, you went through this full example, right? You use Praemium, and that’s a platform provider, Praemium’s SMA platform. And so, go to Shani’s article, you can have a look at that. But the basic conclusion that you came to, Shani, is that it’s expensive and there are multiple fees that investors face.

Jayamanne: Now it’s important that we recognize here that the market for accessing SMAs as an individual investor is nascent in Australia. SMAs are usually only available through a financial advisor. So, what are the alternatives for individual investors that are looking for something similar?

LaMonica: Well, I think the caveat with all of this is that there is no investment product that is a perfect solution. So, what investors should do is find the strategy that ticks most of the boxes. So, what are the different options here, Shani?

Jayamanne: All right. So, one alternative is to stick with managed funds and ETFs. You’re not paying multiple ongoing fees to own investments. And this is different from an SMA where there are fees to hold them on a platform in addition to the fees from the advisor. If tax is your main concern, ETFs are particularly tax-efficient comparative to managed funds. They do not force investors to inherit the capital gains consequences of other investors if they do decide to leave the fund. And ETFs are also transparent. You’re able to see the holdings of ETFs and understand what you’re invested in.

Mark, I know that you normally just invest in individual shares. Could you talk a little bit about how individual shares might be a good solution?

LaMonica: Well, I think we talked about a couple of different things. We talked about if you want to control your outcomes, if you care about what you hold, then individual shares could be the answer for you. You, of course, have complete control over your investments. You can manage when you buy and sell them without any external influence that impacts tax or transaction costs or rebalancing frequently. What you lose is the administration and portfolio reporting that you get out of these SMA platforms and, of course, the ability to make decisions across multiple portfolios. And as an individual investor, you’re not really losing much here because that’s all stuff that’s mostly important for advisors.

All right, Shani, you’ve done all this research into SMAs. This was your article that you wrote. You obviously have that significant experience of two weeks working on an SMA product. Do you think they’re right for you?

Jayamanne: Yeah, I mean, I’ve spoken about my investment strategy before on the podcast. And let’s pretend here that even if it was really easy for me to access an SMA as an individual investor in Australia, I would say that SMAs aren’t really for me. I can’t justify the cost, and I don’t have a large enough capital base that justifies the tax advantages. Investors who engage with the financial advisor are much more likely to have a large balance that would make the fees for an SMA much more palatable. And I think a large part of finding success as an investor is understanding what does work for you. So, there’s never a perfect fit in the investing world and all we can do is have enough honest introspection to understand our financial goals and what’s achievable given our circumstances. And then we just work on understanding the best solution for us.

LaMonica: And then maybe taking this episode full circle, we’ve been talking about perfect fit. Did you think that this job that you had for two weeks was a perfect fit for you?

Jayamanne: Am I being honest?

LaMonica: Yes.

Jayamanne: No, but I loved Morningstar and the mission and I loved working with individual investors and it ticked those two boxes, and I thought I could work my way into something that I love from there and I did.

LaMonica: Well, there we go.

Jayamanne: With a lot of roundabouts and swings.

LaMonica: As always happens in life. But thank you guys very much for listening. I think we can all say that we’re very lucky that Shani did take that job for two weeks because now it means you’re here.

(Disclaimer: Any advice in this podcast is general advice or regulated financial advice under New Zealand law prepared by Morningstar Australasia Proprietary Limited and/or Morningstar Research Limited without reference to your financial objectives, situations or needs. You should consider the advice in light of these matters and any relevant product disclosure statement before making any decision to invest. To obtain advice for your own situation, contact a financial advisor.)

Invest Your Way

A message from Mark and Shani

For the past five years, we’ve released a weekly podcast and written on morningstar.com.au to arm you with the tools to invest successfully. We’ve always strived to provide independent, thoughtful analysis, backed by the work of hundreds of researchers and professionals at Morningstar.

We’ve shared our journeys with you, and you’ve shared back. We’ve listened to what you’re after and created a companion for your investing journey – Invest Your Way. Invest Your Way is a book that focuses on the investor, instead of the investments. It is a guide to successful investing, with actionable insights and practical applications.

The book is currently in presale which is an important time to build momentum. If anyone would like to support this project you can buy the book now. Thanks in advance!

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