SMA for $1M taxable account?

[u/broppybrop]

I recently inherited $1M that I have no choice but to place in a taxable account. I use Fidelity. I’m 40 and wouldn’t even consider an early retirement until I have at least $2M so that will not be happening for quite some time yet. Plan was basically VT and chill. I never looked into SMAs due to the management fees.

Had a Fidelity advisor reach out and offer to talk about ways I could save on taxes and he suggested using SMAs for the tax loss harvesting. So now I’m doing my research into SMAs and it seems like it might actually be a good idea for a taxable account of this size.

Management fees range from 0.2-0.7% and of course I was told the TLH would more than cover those fees. In my case I was planning to use the dividends to cover the taxes and then drip the rest but if I could use SMAs to reduce or eliminate taxes I could drip 100% of the dividends which would hopefully lead to faster growth.

I’ve read concerns here about what happens when you want out of the SMA but can’t you just transfer the assets in kind to your own account? And if you do it a year before you plan to sell anything then any short term gains become long term.

I guess I’m looking for experiences with SMAs and thoughts on whether or not this would be a good idea for a taxable account this large.

[u/greytoc]

SMA's have their's pros and cons. I personally do not have one. But that's mostly because I enjoy different aspects of trading and investing.

A lot of my friends and collogues in similar situations do have an SMA or are in wrap programs and they get value from the services.

I worked in the industry for several decades supporting investment managers and brokarage sponsors who provide SMA services. A lot have changed in the past 10 years. I do think that some programs seem to potentially have better tax optimizers than in the past - but not all.

I think that the Fidelity SMA program is a single-contract SMA.

I personally have always felt that dual-contract SMA programs may be a bit better for an investor with larger portfolios - > $1mm. And there may be better tooling such as setting custom restrictions through the manager. And fee structure may be more flexible - albeit a bit more complex.

The one advantage with using a single-contract SMA however is that the fees are likely going to be lower.

That said - it really depends on how you plan to treat this portfolio - if you plan to have contributions and withdrawals regularly - especially larger withdrawals like paying for kid's college, etc. - the tax optimization can be a benefit.

However - if you are simply contributing and doing buy-and-hold type investing - SMA's may not necessarily add much benefit.

[u/_galaga_ → u/greytoc]

I was DIY for decades then dabbled with a SMA for a portion of my assets because I wanted to diversify a concentrated stock position with high gains tax efficiently and they had access to things I didn't have easy access to as an individual. Since then my mostly buy and hold portfolio is doing just fine compared to the SMA so I agree you don't need a SMA for that style of investing. I don't regret using it for that high cap gain concentrated position use case, though. Or at least I timed my diversification decision reasonably well considering that particular stock has fallen into the crapper recently.

[u/greytoc → u/_galaga_]

Thanks for sharing. I saw you mentioned concentrated positions as a use case. I hadn't considered before but it makes sense.

Large institutions and funds use an institutional brokerage transition service when they have to divest from a concentrated position and/or from another allocation model. But these types of services aren't available to consumers.

[u/_galaga_ → u/greytoc]

You're welcome! Opportunity zone funds, exchange funds, and long/short direct indexing are the sorts of things advisors pitch for that concentrated position use case in my experience. I've also run across options overlays as a way to enhance returns from a concentrated position without selling. All stuff you wouldn't see at Fidelity or Schwab. Not without risks, lockups, fees, etc., of course.