Separately managed accounts have become more popular as the investment industry has moved from commissions to fee-based advice.utah778/iStockPhoto / Getty Images
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Separately managed accounts (SMAs) are gaining traction among Canadian wealth managers, carving out a small but fast-growing niche, particularly when serving high-net-worth (HNW) clients.
SMAs offer access to leading money managers, covering equities, bonds and alternative assets. But the main difference between SMAs and pooled funds such as mutual or exchange-traded funds (ETFs) is that investors own the individual securities in a portfolio rather than owning units in the fund, says Penny Omell, senior wealth manager and portfolio manager at CIBC Wood Gundy in Edmonton.
“With pooled funds, every time money gets added, existing investors’ unit holdings are diluted a little bit,” says Ms. Omell, who uses SMAs for high-net-worth (HNW) clients.
As well, investors in pooled funds are impacted negatively when others sell units, potentially at losses in a market downturn. SMA portfolios change only with manager strategy or by special instruction from the SMA-owning client, she says.
The investment industry’s move from commissions to fee-based advice has driven the growth in the use of SMAs , says Vincent Linsley, associate director of Toronto-based research firm Investor Economics, an ISS Market Intelligence business, who co-authored a recent report examining the growth of SMAs and unified managed accounts (UMAs), which allow multiple mandates in one account.
“Because there are so many fee-based advisors, they like using SMAs because they can outsource investment management,” he says.
At the end of 2023, SMAs and UMAs accounted for about $120-billion in assets under management (AUM), according to Investor Economics. While a fraction of the almost $2.5-trillion of AUM in mutual funds and ETFs in Canada, the use of these investment vehicles are growing.
In 2013, SMAs were used by about 50 per cent of fee-based advisors. By 2023, almost seven in 10 were using them.
“Originally, these were positioned as offering access to world-class, institutional [money] managers,” Mr. Linsley says, adding mutual funds arguably do the same thing. “But with SMAs, you can get access to [money] managers with no mutual fund footprint in Canada.”
Fees are also typically lower, although that gap is closing, he notes. And SMAs have the added benefit of customization by excluding securities already held in client portfolios.
“SMAs also offer dealers access to customized strategies only available through [the products],” says Vlad Tasevski, head of asset management for institutions and investors at Purpose Investments Inc. in Toronto.
Purpose Investments’ SMAs, like other offerings in Canada, typically provide investment dealers with a bespoke model and trading instructions, and dealers then manage the SMAs for their clients.
SMAs also often allow advisors to harvest tax losses more effectively.
“With an SMA, we can pick a security down in value and instruct the money manager to liquidate for 30 days, then buy that same security back,” Ms. Omell says. That crystalizes losses, offsetting realized gains and reducing taxation in non-registered accounts. “That puts more dollars in clients’ pockets.”
The Canadian SMA industry is highly concentrated, with three providers – RBC Dominion Securities Inc., CIBC Wood Gundy and BMO Nesbitt Burns Inc. – making up about 80 per cent of the market, according to Investor Economics, but smaller providers are offering SMAs increasingly.
That includes Seamark Asset Management Ltd. in Halifax.
“SMAs are really about bringing the institutional structure to the retail, private client side,” says Don Wishart, president of Seamark.
He adds that technological advances have lowered trading and administrative costs, making SMAs feasible for investors who meet certain wealth thresholds.
Most SMAs come with $100,000 minimums and are generally suitable for clients with at least $1-million in investible assets. Seamark‘s minimum threshold is $750,000 in investible assets, but most clients using SMAs have significantly more, Mr. Wishart says.
“If you had 100 clients with $750,000 in assets each, you’d be run thin with keeping up with their unique needs,” he says, adding that a fee-based structure would be less advantageous as compensation.
In turn, a key SMA advantage would be lost: providing advisors more time for services such as financial planning, Mr. Wishart says.
“At the same time, SMAs allow advisors to offer more bespoke investment management,” he says.
As such, SMAs allow clients concerned about climate change, for example, to exclude oil and gas firms from an equity mandate that otherwise includes exposure to the sector, he adds.
Furthermore, SMAs are attractive to advisors – especially those who offer mutual fund and ETF strategies primarily – serving high-net-worth clients who want more tailored portfolio solutions.
“They can offer superior investment services than they could otherwise and not lose clients to bigger firms,” Mr. Wishart says.
That said, the SMA market is increasingly competitive. Innovation is often driven by the largest firms with the most resources to invest in technology to support the complexities of managing many mandates across thousands of different accounts.
Mr. Linsley says a recent development among the largest providers is in-house mandate SMAs with “one-ticket solutions, such as a tactical income portfolio” that can include individual securities and ETFs.
“This allows clients to own an SMA in a portfolio of less than $500,000,” he says, as providers can use economies of scale and their own infrastructure to bring down management costs, making the lower threshold viable.
The industry is also shifting toward offering UMAs that hold multiple mandates in one account, which SMAs can’t do.
RBC DS has offered UMAs since 2010 because they require less onerous reporting than if a client holds many SMAs in a portfolio, says Mike Scott, managing director of RBC DS. “Normally you see about two to four strategies per UMA, and it’s easier for clients to grasp.”
Other firms – including investment dealers such as BMO Nesbitt Burns and Canaccord Genuity Wealth Management and asset managers such as TD Asset Management Inc. – have rolled out UMAs, seeing them as another edge for advisors.
“When you can bring high-quality money management across many mandates, tying it to wealth, estate, tax and business planning … you can see where an advisor can make a big difference for clients,” Mr. Scott says.
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