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An Alternative to Mutual Funds

Since Americans living abroad are frequently denied the opportunity to buy mutual funds, how can investors diversify their portfolios without being responsible for the day-to-day management of dozens of individual stocks and bonds?

One possible answer is a separately managed account, or SMA. An SMA is a customized portfolio offered by a brokerage firm and managed by an independent investment management firm or money manager. Unlike a mutual fund, where you buy a unit of the “basket” of investments, in a SMA you actually own the stocks/bonds/ETFs (exchange traded funds) in the portfolio. The assets are in your name rather than in the name of the company that manages the fund.

Are SMAs only for the very rich?

Until recently, due to their high administration costs, SMAs were only available for individuals who could put down a minimum of $1 million. However, developments in technology opened this type of program to the wider public. In some cases now, the minimum could be as low as $50,000.

The services of a money manager are very useful since there may be times when you want to customize your portfolio in a more precise manner. With a mutual fund, you can’t make specific changes in the portfolio because the fund is a package deal. With an SMA, you can be more involved with your investments and give general guidelines to the managers, but without being entirely on your own.

Tax benefits

Depending on when you invest your money, you may gain certain tax benefits from owning an SMA as opposed to a mutual fund. SMA investors aren’t liable for the capital gains of their stocks prior to their purchasing, while mutual fund investors are responsible for all gains, even prior to their purchase, because they own part of the “basket”

When diversifying your portfolio, speak with your financial advisor to find out if an SMA can help you achieve your financial goals.

Douglas Goldstein, CFP®, investment advisor, is the co-author with Grandmaster Susan Polgar of Rich As A King: How the Wisdom of Chess Can Make You a Grandmaster of Investing

 

Profile Perspectives is a personal finance blog based on articles Doug Goldstein, CFP®, director of Profile Investment Services, Ltd., published in The Jerusalem Post. The information posted is purely informational and does not constitute investment or tax advice. Advertisements on the site are neither endorsements nor recommendations. Consult your professional advisors before making any investments based on articles or advertisements. Securities offered through Portfolio Resources Group, Inc., member of FINRA, SIPC, MSRB, FSI. Accounts carried by Pershing LLC., Member NYSE/SIPC, a subsidiary of The Bank of New York Mellon Corporation.

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