SMAs Have Tax Advantages For High-Net-Worth Clients
February 12, 2014
•
Rey Santodomingo
Comparing Tax-Managed SMAs vs. ETFs
Advisors using ETFs for index-style exposure in their client accounts should also consider using tax-managed SMAs. While market index ETFs can be a good choice for smaller accounts, or accounts with no need for customization, tax-managed SMAs are often a better solution for larger accounts—providing the same market exposure, but with the added potential benefits of increased tax efficiency and flexibility.
We at AEPG Wealth Strategies use tax-managed SMAs within UMAs for our clients with relatively large taxable accounts. While we agree with all the the benefits mentioned that come in this type of structure, there are some additional should be considered that potentially offset some of the benefits. These include potential tracking error costs that come with representative sampling tax-managed SMAs, cash drag costs (when not using a proxy investment to avoid wash sale rule), potential short-term capital gain costs (when using a proxy), and increased trade costs. We think for the most part that the benefits outweigh these potential costs, but these costs are definitely something to be mindful of.