With increased taxes on high superannuation balances, a lot of people are talking about alternative structures for keeping their investments.
One idea that is coming up a lot is a niche product that used to be the preserve of the ultra-wealthy and institutions, known as a Separately Managed Account (SMA).
With technology helping to slash the cost of starting and maintaining an SMA, its popularity is growing quickly, with funds under management rising 35% in the last year to an impressive $147.99 billion.
Financial Planners Ensuring SMA Growth
Much of that growth will have come through financial planners who have been putting eligible clients into SMAs as a long-term portfolio vehicle that like superannuation, is ideally suited for savings and investment and for the retirement phase as well.
A decade ago there was less than $9b in SMAs so the secret is getting out and there are some very good reasons why this structure can be useful, particularly for those who favour direct ownership of assets rather than having them pooled with thousands of other people.
Choose Between Model Portfolios
When using the SMA structure, you can select a model portfolio of investments which can be managed on your behalf by a professional manager.
That can include familiar options like direct shares, listed investment companies such as Australian Foundation and Argo, managed funds, exchange traded funds and ETFs, and you retain ownership over the underlying assets.
However, unlike when buying units in a managed fund that also offers professional management, the assets within an SMA are not pooled but are individually owned.
That allows for a much more customised approach that takes your individual tax and retirement needs into account.
Existing Shares Can Be Rolled into an SMA
One such customisation might be to incorporate some or all of your individually owned shares into the SMA—something you couldn’t do with a pooled investment fund.
SMAs are also offered on some adviser platforms as well.
They are not the solution for everybody with most advisers only recommending them for portfolios of $250,000 or more but they are worth considering for people who are comfortable with delegating some financial management responsibility to a professional but still want to keep beneficial ownership and control of investment assets.
Greater Efficiency and Lower Costs
SMA’s may also increase the efficiency and reduce administration costs compared to other ownership structures.
By having beneficial ownership of the underlying assets, the owner gets full access to dividends and franking credits and the cost base of the assets is the same as if they were purchased in your own name.
Effective Capital Gains Management
Tax can also be managed more effectively than in a pooled fund, so that when buying and selling, capital gains and losses can be individually chosen to reduce the overall tax burden for the individual concerned.
For example, some shares with a very large capital gain can be held and only sold in a low tax year and might be paired with a tax loss sale as well.
This corresponds most closely with personally owning shares through a broker and choosing which ones to keep or sell, although the process can be automated more with the adviser also having input.
Useful Tool for Retirees
Being able to manage capital gains effectively can be really useful during retirement, particularly if you want to cater for individual changes such as a strategy to deal with sequencing risk – the risk of a large loss in the early years which will be difficult to overcome without a salary coming in.
With a mix of defensive and growth assets, the idea might be, for example, to sell down the defensive assets in a bad market but keep the growth assets intact to overcome longevity risk later on.
Of course, the biggest competitor to an SMA is the old-fashioned idea of owning and managing assets in your own name, with or without help from a financial planner.
That will obviously remain a popular alternative but the growth in SMAs is impossible to deny.
In a world in which delegation, control and transparency rarely exist together, the growth of SMAs is likely to continue at its current breakneck pace.
