How Separately Managed Accounts Help Clients Reach their Goals

Lily Styrmoe, CFP®, CSRIC™

Feb 1, 2022

At TCI we are always talking about how to help clients accomplish their goals. We often refer to this as leading a purpose-filled life. If you had financial freedom, what would you want to do with it? Leave a legacy for your children, travel endlessly or support a nonprofit in a significant way? We’re here to develop a financial plan that can help you achieve those goals. That being said, we can also help you accomplish some goals that can be beneficial to our planet as well.  

As longtime blog readers know, one of my passions is conservation and how that relates to sustainable investments. Over the past few years, the money being invested into ESG (environmental, social and governance) funds has continued to grow at a rapid pace. As of 2020, USSIF reported $17.1 Trillion are managed in the United States according to sustainable investment strategy.

How Separately Managed Accounts Work

With the increased interest in sustainable funds, we can consider other investment vehicles that are now available to clients at lower minimums and lower expenses. Say hello to the SMA or separately managed account. Often an alternative to a U.S. Large Cap mutual fund, an SMA holds a basket of securities (similar to a diversified mutual fund) but allows the client to take a more active role in deciding what to screen out from the portfolio-whether it be pharmaceutical companies, companies profiting from tobacco sales etc. So, when a well-diversified sustainable focused mutual fund doesn’t cut it, an SMA is another option.

Accomplishing ESG Goals with SMAs

Many of my clients have strong values when it comes to climate change. Our discussions often focus on using sustainable funds to help ease the burdens of greenhouse gas emissions, improve conservation efforts or focus on water management. That’s a key subject when your office is based in the Sonoran Desert. Nevertheless, even within the ESG niche, clients often have different priorities as to what they would like to protect. For example, Dimensional Fund Advisors offers SMA fund screens that can help protect the rainforest, exclude investments in certain countries or prioritize companies that are working to include more diversity in the board room. Not only do these screens help accomplish ESG goals, but they can also prevent greenwashing, a real problem in the sustainability space.  These might not be what investors think about when it comes to ESG, but the evolution of these options is promising.

SMAs Aren’t Exactly a Golden Ticket

Of course, SMAs aren’t the right fit for everyone. Even though costs are going down for SMAs there can be higher account minimums and expenses that potentially increase overall cost. If you’re interested in pursuing an SMA portfolio there needs to be a conversation with your advisor about how it will perform differently from its benchmark, depending on the number of screens or exclusions that have been put in place. There will be an inherent decrease in overall diversification as clients add more screens to their SMA. With some platforms, you can explore different screens to see the overlap with the current strategy when compared to the benchmark.

It is exciting to see the growth in ESG investing, as well as the trend with SMAs offering lower costs and lower minimums. Whether you are just learning about TCI or a long-time client, your values and goals are always evolving. If an SMA piques your interest to focus on a specific value- whether that be climate change, diversity, or animal welfare…we can explore those options together. We always want to encourage those conversations and utilize the tools available to understand what’s most important to you- thereby helping us empower more purpose-filled lives.

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