Investment Management - IMAs vs SMAs?

One of the most frequently asked questions we receive at MDA Guru involves clarifying the investment management features of IMA’s versus SMA’s. We asked Brian Nash of Merlea Investments, and recent addition to the MDA Guru team, to help explain what the differences are and how they can affect your practice. Before deciding on embarking into the managed accounts world we highly recommend advisers understand these differences.

Under both account structures, clients maintain beneficial ownership of the underlying shares, which is key.  However, the biggest difference between the two approaches is that under an SMA client portfolios replicate the overlying model whereas through an IMA every client’s portfolio can be different, no two portfolios will be the same.

Naturally, SMAs tend to be the more efficient structure for advisers, i.e. a tactical tilt can be applied to the model portfolio and once applied, replicated across all clients.  On the other hand, with IMAs, achieving the same result can be a much more onerous task. Brian has taken this challenge to heart, “It has taken some time to achieve, but over the years Merlea has found that by leveraging the right software we can implement client portfolios with all the benefits of IMAs with the same efficiency as SMAs.”

Here is a list of the main points Brian provided as to why Merlea Investments prefer to use IMAs:

·       Ability to Retain Existing Shares: Often clients come to us with small parcels of shares or even fully established portfolios.  Under an IMA arrangement we can pick and choose which investments we would like to retain and incorporate into the clients new recommended portfolio, regardless of whether they are in our current models.  The alternative would be selling everything down to buy into an SMA or managing these assets separately.  An IMA will retain the clients cost bases often giving us a more flexible tax outcome as well.

·       Market Timing: We all know you can’t ‘time the market’, but as a value manager we argue that it doesn’t pay to buy overpriced assets either. SMAs are mandated to buy into the model portfolio regardless of price if a new client comes onboard.  Using IMAs we have the flexibility to set buy prices for stocks that we find attractive and ‘turn off the tap’ if they become overpriced.  In this manner, a client that comes onto the service 6 months after a run on the banks will have a very different looking portfolio to a client that came on earlier.  We would rather have the client sit in cash than purchase assets above fair value.

·       Client Choice: Under an IMA, clients have a greater say over where their money goes.  Whether they are personally opposed to gambling stocks or have a special interest in renewal energy, we can tailor to their needs.  Under an SMA, client choice can be limited to what is/isn’t in their risk model at that time.

·       Individual Tax Outcomes: Using IMAs, no two client tax outcomes will be the same.  We can buy/sell assets based on specific needs; high franking yields for high income earners or gradually selling down large capital gains over multiple tax years.

·       Portfolios Tailored Precisely to Client Needs: Finally, it wouldn’t be reasonable for an adviser to maintain dozens of model portfolios under an SMA.  But as financial advisers we have the responsibility to acknowledge that every client’s needs and risk tolerances are different and should be catered to.  We believe that IMAs allow us to achieve a greater fulfilment of our FoFA requirements and the best interest duty.

Both structures have their strengths and weaknesses and can be appropriate for different sets of clients. Merlea Investments is a long-term advocate of Individually Managed Accounts (IMA), our investment process is built around this account structure.  We believe that IMA’s provide greater flexibility and therefore better outcomes for clients over Separately Managed Accounts (SMA).

Merlea Investments offers both IMA services to individuals and model portfolio / software solutions to advisers alike.  Brian sits on multiple investment committees sharing his unique investment research on a dealer group level.  Feel free to contact MDA Guru with enquiries regarding any of the topics discussed above and we will be happy to help or point you in the right direction.