In this week’s Retirement Talk podcast, with Laura Stover, RFC®, and Michael Wallin, CFP®, we delve into the major advantages of separately managed accounts (SMAs), a topic that doesn’t often make its way into the podcasting world. SMAs can be a game-changer for those nearing retirement or already in retirement.
SMAs offer direct ownership of investments, reduced transaction costs, and the potential for tax harvesting. These benefits set them apart from traditional mutual funds or ETFs, which are more commonly discussed in the financial world.
Mutual funds, for example, are essentially a pool of investments shared among many investors, often with low minimum investment requirements. While they offer diversification, they lack individual control over the underlying assets. ETFs, on the other hand, are a hybrid of mutual funds with lower costs but less active management.
The key distinction with SMAs is that they provide personalized investment options tailored to your specific goals and preferences. You have direct ownership of the securities in your portfolio, which allows for more control over your investments and potentially better tax planning. This is especially valuable in the context of tax harvesting, where you can strategically sell assets to offset gains and minimize taxes.
However, SMAs may not be suitable for every investor due to their higher entry requirements. Typically, SMAs require around $150,000 to $200,000 per sleeve of the portfolio. For those with smaller portfolios, a blend of SMAs and other investment options, like ETFs, can be an effective strategy to achieve diversification and control.
We also touch upon the emotional aspect of investing. Emotional reactions to market news and events can lead to impulsive decisions that may harm your long-term returns. Having a well-thought-out investment strategy, as part of a comprehensive financial plan, can help you stay the course and avoid detrimental emotional reactions.
Lastly, it’s crucial to remember that investment decisions should align with your overall financial plan, which includes income planning, tax strategies, estate planning, and more. A holistic approach to financial planning, as encapsulated in our six-pillar Life Arc framework, can help you make informed decisions and work toward a more secure retirement.
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Timestamps (show notes):
0:01:38 Importance of discussing separately managed accounts (SMAs)
0:03:36 Differences between mutual funds and SMAs
0:07:24 Explanation of ETFs as a hybrid of mutual funds
0:08:48 Disadvantages of staying in a mutual fund during market decline
0:10:55 Advantages of separately managed accounts (SMAs)
0:12:14 Tax harvesting potential with SMAs
0:13:54 Core-satellite strategy with SMAs and ETFs
0:14:12 Graduating from mutual funds with a modest retirement portfolio
0:14:47 Tax advantaged opportunities for clients to offset capital gains.
0:16:18 Importance of understanding policy and investing holistically.
0:18:30 Separately managed accounts require active management and engagement.
0:20:20 Letting the managers do their job and avoiding emotional reactions.
0:22:49 Benefits of direct ownership and cost basis of securities.
0:25:34 Graduating from mutual funds to other investment vehicles.
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