The investment vehicle an advisor chooses when creating investment strategies will have important performance implications for the client.
Investments Vehicles Include:
Separately Managed Accounts (SMAs) – There are several benefits associated with the use of SMAs, but perhaps the most important is their flexibility. Any losses that may exist on independent holding can be realized to offset gains elsewhere in the client’s portfolio. As the client’s investment priorities change, the proactive advisor has the autonomy to alter the portfolio while maintaining the portfolio’s investment discipline. This can be achieved by maximizing gain or loss realization and gifting to charity tax lots with high appreciation. Further, the advisor can use the more advantageous tax-lot method for realizing gains and losses. SMAs offer greater fee transparency, improved autonomy to support client objectives and the potential for “tax alpha” resulting from tax-aware best practices. As a tax-aware investment, SMAs can provide meaningful benefits when managed to specific client objectives and constraints.
At Clearview Wealth Solutions we use SMAs extensively.
Unified Managed Accounts (UMAs) – UMAs typically combine two or more SMAs to provide a comprehensive, systematic solution. All accounts are integrated. Tax-efficient customization can be automated and administered over all accounts at once. UMAs are tax aware and can benefit clients through enhanced tax efficiency and wash sale avoidance. There are drawbacks: UMAs add a layer of fees, remove the advisor from the day-to-day management process and once implemented, cannot be easily altered to reflect changes to client circumstances.
At Clearview our internally managed, customized portfolios solutions have no need of UMA complexity or cost.
Mutual Funds (MFs) – Mutual Fund firms make an active and ongoing market in the shares of a fund based upon the Net Asset Value (NAV) of the underlying securities. The NAV is calculated daily. A wide variety of mutual funds are available, often with modest initial investments. MFs offer active management, liquidity, bookkeeping and efficiencies of scale; however, management fees and administrative fees can be high, and often investors incur high loads, or sales commissions. Most importantly, managers often ignore the tax implications caused by trading activity and focus solely on gross, pre-tax returns. MFs pass through realized short- and long-term gains, dividends and interest to their investors who must then pay taxes on these gains. MFs may have embedded gains at purchase that will have tax ramifications to the investor even though the investor may not have owned the mutual fund or shared in the appreciation.
At Clearview we limit the use of MFs to satellite strategies where the manager has demonstrated the ability to add value. As MFs are not usually tax efficient, our preference is to use them in tax-deferred accounts.
Exchange Traded Funds (ETFs) – Exchange-traded funds are investment products designed to represent established stock benchmarks or baskets of securities. Unlike mutual funds, ETFs trade like stocks and are priced throughout the trading day. ETFs are commonly recognized as tax efficient because of their infrequent trading and the fact that there are no embedded gains at purchase as can be the case with MFs. ETFs offer diversification, low management fees and are typically tax efficient but they are not tax aware.
We use ETFs on a limited basis at Clearview.