The brokerage industry is always inventing new products and then touting the incredible benefits to you, the individual investor.
One such product has created some confusion for one of my readers, who wrote as follows:
“I thank you for your postings about how mutual funds will not protect us in bear markets. They will go with their mandate of sticking to their style and losing money.
This is a good insight for me— though it might look obvious to you.
I was recently persuaded by a brokerage firm to open Separately Managed Accounts – for large cap, small cap and international. The brokerage firm touted the advantages of SMAs.
It stuck me that SMAs fall into the same trap as the mutual funds in regards to bear market protection. Am I thinking right or not?
Last time I had a SMA with them, they made it so difficult to close it. I am now afraid of opening another one with them.
You should write a brief note about the perils of SMA. Though it may be obvious to you, it is not obvious to me.
Please do not use my name in case you choose to write an article about it.”
Okay, first things first. If you are afraid of opening another SMA, don’t! As I have always stated, the comfort level of the investor is most important. If there is not match with the intended investment or method, find a different one. After all, whichever you select, it should be for the long term and that will only work if you and your advisor’s philosophies are aligned.
Even though SMAs have been around for a long time, most people are not familiar with them. To get a better understanding, here’s one definition I read:
“When you invest in an SMA, you own individual securities (unlike a mutual fund investor, who owns shares of the entire fund). Though SMAs have set investment styles or strategies, you have the freedom and flexibility to tailor your portfolio to address personal preferences and financial goals. Although portfolio managers may oversee hundreds of separately managed accounts, your account is “separate” and distinct from all others.”
I really did not make this up; this is from a major firm promoting these products. This description tells you exactly what any fee based advisor (depending on his specialty) will do for you as well. There’s nothing new here; it’s the same pig, but with a different lipstick.
Of course, nowhere in the material does it state any real benefits to you as the investor, like what is the strategy during a bear market. How will the portfolio manager adjust? Or is it up to you to tell him you want out?
When a product like this is being touted because of the ‘incredible growth’ it has experienced, you can be sure that there is some benefit for the transaction hungry, commission motivated Wall Street crowd that most likely outweighs the benefits you are receiving. It’s the way the game is played.