The coming year will see more interest in separately managed accounts, according to Aron Kershner, managing director at Goldman Sachs Asset Management.
As investors are learning more about the advantages of separately managed accounts (SMAs), or direct indexing as it is also known, the category is attracting attention and is only at the beginning of its growth stage, Kershner said in an interview.
Goldman Sachs Asset Management is one of the largest firms offering SMAs with $289 billion in assets under management. The channel is growing because investors are becoming more aware of the tax and return advantages the strategy can provide, Kershner said.
SMAs can take an individual investor’s risk tolerance into consideration, provide the tax advantages of tax loss harvesting, and accommodate philanthropic goals, Kershner said, but, because each investor’s goals are different, it is impossible to generalize about the accounts.
“SMAs are gaining traction and taking on a core role in portfolios as investors become more aware of the advantages, but we are only in the early stages of adoption,” the managing director said. “No one size fits all, which is why it is difficult to generalize, but is also why the strategy provides advantages to the investor.”
Direct indexing provides an index investing strategy that involves directly purchasing the components of an index at the same weights as the index, a task that used to be too time consuming for investors and advisors but has now become easier because of technology and lower transaction fees.
The strategy can provide greater autonomy, control, and tax advantages to certain investors over owning an index mutual fund or an index exchange-traded fund, according to Investopedia. The technique used to be reserved for wealthy investors, but is now available to more investors because of the rise of zero-commission trading and fractional shares. However, the strategy can still be time consuming for the individual investor, so many brokers, such as Goldman Sachs Asset Management, have begun offering direct indexing services to their customers.
Until recently, direct indexing made sense only for large investors and typically would be more costly to implement and maintain than owning an index fund. As stock trading fees have dropped to effectively zero, index investors are increasingly interested in taking some control and autonomy in their portfolios, self-replicating indexes that were previously only practical and cost-effective by using index mutual funds or index ETFs. Additionally, with the increasing ubiquity of fractional shares, it is easier for advisors to replicate even a large index with modest sums of investible funds, Investopedia said.
SMAs are becoming one of the core equity holdings for many investors, Kershner added. “We work with investors across a wide spectrum for both fixed income and equities to access relatively predictable market returns. About half of the portfolios we work with use some SMAs.”
Goldman Sachs Asset Management offers SMA services over a wide range of market exposures to deliver bespoke results for individual investors, Kershner said.
At the same time, the strategy allows investors to take advantage of any losses to offset gains and reduce taxes, he noted. The strategy also allows investors to fulfil philanthropic goals by donating appreciated stock rather than cash.