When evaluating an investment for your portfolio, one of the key factors to consider is the cost associated with owning that investment. When it comes to mutual funds and ETFs, knowing the internal ownership cost is relatively straightforward, while understanding the fees associated with separately managed accounts (SMAs) can require a little more research.
Mutual fund and ETF expense ratios
The expense ratio, which can be found on the fund’s website or in the associated prospectus, is expressed as a percentage and notes the cost to each investor as a proportion of the investment in the fund. The expense ratio is all inclusive of costs associated with the fund, covering all operational costs, management fees, and any other fund-related expenses.
More important, all investors who purchase a specific share class of a mutual fund or an ETF pay the same expense ratio. The fee is deducted directly from fund assets and isn’t shown as a separate fee or charge to investors. Instead, any ETF or mutual fund returns are net of fees, with the expense ratio functioning as a drag on returns.
As an example, consider an ETF that has an expense ratio of 50 basis points (bps) or one half of one percent (0.50%). This means that for every $10,000 invested, the cost to the end investor is $50 per year, exclusive of any other associated costs. If the underlying investments within the ETF gain 5% in a given year, the investor’s performance report will show a gain of approximately $10,450.
Investors should be aware that the expense ratio doesn’t always paint a complete picture of fees associated with owning these vehicles. For some classes of mutual funds, clients might also need to factor in any front-end loads or sales charges. For mutual funds and ETFs that are owned within advisory accounts, clients need to consider the internal costs of the fund in addition to the advisory and service fees charged on total assets.
How do SMA fees work?
The cost associated with an SMA differs from an ETF or mutual fund expense ratio in several ways. Rather than being deducted directly from the fund’s assets, these fees are often more visible, directly shown on an investor’s statement.
Some SMA investors, such as those that use a unified managed account, may be charged a wrap fee. This is a comprehensive fee that bundles the costs for several different services, including investment management, administrative services, and trading. These wrap fees can be broken down into several components, with some costs varying and dependent on the firm and advisor.
The SMA manager fee
The manager fee for an SMA is the cost associated with investment managers for their services. This fee compensates the manager for portfolio management, research, and investment decisions associated with the SMA. This fee can vary based on the manager, the complexity of the investment strategy, and the amount of assets being managed within the strategy.
According to data from Cerulli Associates, SMA management fees range from 18bps to 60bps, with equity strategies typically charging higher management fees than fixed-income strategies.1
The service fee refers to the fee charged to cover various services provided by the investment manager or advisory firm. These services include administrative support, custodial services, reporting, and other operational expenses related to the account. Service fees are typically charged by the broker-dealer, not the investment manager, with some broker-dealers electing to waive these fees entirely.
The third, and often largest component of the wrap fee, is the advisory fee. This fee is payment for the investment advisor or manager’s services in overseeing and making decisions regarding the portfolio. These services can include manager research, portfolio construction, asset allocation, and ongoing monitoring of the investments currently within the portfolio For SMAs used within wrap advisory accounts, the all-inclusive fee is the total of the manager fee, the service fee, and the advisory fee.
Finding the costs associated with your SMA
Since these fees can vary across firm and advisor, this means that two investors within the same SMA strategy might have different associated costs. Since these fees can vary, they aren’t listed on a fund’s website or within a prospectus.
The highly transparent nature of SMA fees means that investors can review their statements regularly to gain an understanding of the total costs associated with their investment within the strategy. For wrap accounts, firms are also required to provide a brochure that details all fees within their wrap fee program, outlining the potential cost to the investor before the investment is made. Wrap fees are deducted directly from the client’s account, typically on a quarterly basis, enabling the client to see all fees in their entirety.
UMAs and SMAs are intended for HNW, investment-savvy individuals and may not be appropriate for all investors. But for those who need a more tailored investment strategy, understanding these costs is a critical part of the due diligence process. For a more detailed explanation of these fees, your financial professional can help you understand the costs associated with your SMA.
1 The Cerulli Edge, U.S. Managed Accounts Edition, 2022. The fees mentioned here include both single-contract and dual-contract SMA fees.
This material is for informational purposes only and is not intended to be, nor shall it be interpreted or construed as, a recommendation or providing advice, impartial or otherwise. John Hancock Investment Management and our representatives and affiliates may receive compensation derived from the sale of and/or from any investment made in our products and services.
The views presented are those of the author(s) and are subject to change. No forecasts are guaranteed. This commentary is provided for informational purposes only and is not an endorsement of any security, mutual fund, sector, or index. Past performance does not guarantee future results.
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