Portfolio Perspectives: Navigating High-Net-Worth Challenges? SMA It Ain’t So

January 12, 2024

By Lucas Felbel, CIMA®
Director, Portfolio Services

In the realm of wealth management, high-net-worth (HNW) clients present a unique set of challenges. These individuals, with their concentrated positions and tax considerations, demand bespoke solutions to preserve and grow their wealth. As you prepare to engage with a client expressing interest in individual stocks and bond issues, considering Separately Managed Accounts (SMAs) becomes essential to their advisory experience.

Unlock the Power of SMAs

Separately Managed Accounts, or SMAs, stand as a versatile tool in an advisor’s arsenal, offering tailored solutions to HNW clients. Customizability to individual client situations and the potential to optimize tax efficiency make SMAs particularly relevant in this demographic. Unlike the average investor primarily focused on wealth accumulation, HNW individuals prioritize wealth preservation, portfolio diversification and optimization of after-tax returns.

Selecting the appropriate SMA involves a nuanced understanding of factors beyond investment strategy compatibility. Account type, client risk profile, income tax bracket, time horizon and liquidity considerations all play pivotal roles in evaluating the suitability of SMA strategies within the broader client portfolio.

Dynamic Solutions for HNW Clients

Dynamic’s Asset Management team deploys a range of SMAs to address the unique needs of HNW clients. A detailed exploration of some of the solutions we offer follows:

Direct Indexing: This strategy is designed for clients seeking individual stock exposure. Utilizing daily tax-loss harvesting reviews, it aims to maximize overall portfolio returns while providing opportunities for after-tax alpha. Common use cases include business owners capturing capital losses for future enterprise sales and clients diversifying low-cost basis securities in a tax-efficient manner; Dynamic Custom Indexing is tailored for this purpose.

Municipal Bond Portfolios: For high-income earners in states with high taxes (e.g., California, New York, New Jersey), our actively managed individual municipal bond portfolios leverage state-specificity and decades of fixed income market experience. The goal is to maximize tax savings by investing in in-state municipal bonds, which often avoid both federal and state taxes. Dynamic’s Custom Tax Aware Fixed Income SMA can enhance tax efficiency with a process-driven approach.

Customized Individual Bond Portfolios: Offering a fully personalized solution, this SMA can evolve over time based on changing client circumstances. Clients can opt for a staggered investment grade bond and CD ladder for predictable income, short-term treasuries for impending purchases, or a bespoke mix aligned with their risk tolerance and financial goals. Dynamic Custom Fixed Income capitalizes on the current rate environment to uncover opportunities in the bond market.

Options Hedging Strategies: Tailored for the long-term, buy-and-hold crowd, options hedging is ideal for clients with large single stock positions with low-cost basis, or those seeking to diversify out of vested company stock compensation. This strategy employs call writing to generate income and put option purchases to mitigate downside risk. Benefits include reducing single stock volatility, accelerating portfolio diversification, and providing income-generating opportunities. If concentrated stock risk is a concern for your clients, consult with Dynamic’s Asset Management team to determine if a customized options hedging strategy is a suitable solution.

Perspective on SMA Costs

When addressing the inevitable question of cost, it’s essential to put SMA fees in perspective. While fee discussions can be sensitive, SMAs often prove more cost-effective compared to mutual funds and actively managed ETFs. With fees ranging from 12 to 50 basis points, SMAs utilize individual stocks, bonds and derivatives without the expense ratios associated with traditional funds.

Client perception of SMA fees versus mutual fund and ETF fees may differ, and advisors can ease concerns with transparency and setting expectations upfront. Moreover, partnering with Dynamic opens doors to preferred pricing arrangements with SMAs, enhancing the value proposition for advisors and clients’ investment advisory experience.

Elevate Portfolio Performance

Correctly positioned SMA solutions have the potential to elevate portfolio performance, leading to increased client satisfaction and retention rates. Dynamic’s Asset Management Team, drawing from extensive experience with HNW clients, encourages advisors to explore our suite of SMA solutions. By leveraging SMAs intentionally, advisors can not only add significant value to the investment experience of their clients, but also navigate the challenges of the high-net-worth landscape with finesse.

Invest with intention.

For more Dynamic Portfolio Perspectives, check out “Mastering Tax-Loss Harvesting for Optimal Returns.”

For more information, contact Dynamic’s Investment Management team at (877) 257-3840, ext. 4 or investmentmanagement@dynamicadvisorsolutions.com.

As Director, Portfolio Services, Lucas Felbel, CIMA®, leads the implementation, monitoring and evaluation of trading activities at Dynamic Advisor Solutions.

Disclosures

This commentary is provided for informational and educational purposes only. The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. This is not intended to be used as a general guide to investing, or as a source of any specific recommendation, and it makes no implied or expressed recommendations concerning the manner in which clients’ accounts should or would be handled, as appropriate strategies depend on the client’s specific objectives.

This commentary is not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. Investors should not assume that investments in any security, asset class, sector, market, or strategy discussed herein will be profitable and no representations are made that clients will be able to achieve a certain level of performance, or avoid loss.

All investments carry a certain risk and there is no assurance that an investment will provide positive performance over any period of time. Information obtained from third party resources are believed to be reliable but not guaranteed as to its accuracy or reliability. These materials do not purport to contain all the relevant information that investors may wish to consider in making investment decisions and is not intended to be a substitute for exercising independent judgment. Any statements regarding future events constitute only subjective views or beliefs, are not guarantees or projections of performance, should not be relied on, are subject to change due to a variety of factors, including fluctuating market conditions, and involve inherent risks and uncertainties, both general and specific, many of which cannot be predicted or quantified and are beyond our control. Future results could differ materially and no assurance is given that these statements or assumptions are now or will prove to be accurate or complete in any way.

Past performance is not a guarantee or a reliable indicator of future results. Investing in the markets is subject to certain risks including market, interest rate, issuer, credit and inflation risk; investments may be worth more or less than the original cost when redeemed.

Investment advisory services are offered through Dynamic Advisor Solutions, LLC, dba Dynamic Wealth Advisors, an SEC registered investment advisor.

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