Evaluating the Momentum: The Continuing Shift to Separately Managed Accounts Beyond 2023

More than a year has passed since the 2022 Hearts & Wallets report highlighted a significant shift in investment preferences among affluent Americans, with a notable rise in the adoption of Separately Managed Accounts (SMAs) and a gradual departure from traditional mutual funds. As we delve deeper into 2024, it becomes imperative to assess whether this trend has sustained its momentum and to understand the forces that will shape its trajectory in the years to come.

According to the 2022 data, SMAs saw increased utilization, particularly among households with $3 million or more in investable assets. The trend was not only a reflection of the changing preferences among the wealthy but also pointed towards a broader democratization of these investment vehicles, as costs became more competitive and minimum investment thresholds lowered. Laura Varas of Hearts & Wallets viewed this shift as part of a modernization of financial tools that achieve similar goals as mutual funds but with enhanced flexibility and customization.

Now, as we assess the landscape in 2024, several key questions arise: Has the growth in SMA adoption continued at the same pace? Are the driving factors of lower costs and customizable portfolios still influencing investor decisions? Furthermore, has the industry seen new innovations in SMA offerings that could be propelling or hindering their adoption?

To grasp the future direction of SMAs, we must consider various critical variables:

Regulatory Changes: The regulatory environment can significantly impact the attractiveness of different investment vehicles. Any new regulations affecting fees, transparency, or investor protections could alter the competitive landscape between SMAs, mutual funds, and other investment vehicles like ETFs.

Technological Advancements: The role of technology in personalized wealth management is crucial. Enhancements in financial technology that streamline the management of SMAs or improve client interfaces could further fuel their popularity.

Economic Conditions: The macroeconomic environment, including market volatility, interest rates, and economic growth, invariably influences investment preferences. In uncertain times, the appeal of customizable and directly managed investment options might increase.

• Demographic Shifts: As younger investors, who may prioritize issues like ESG (environmental, social, and governance) factors, become more dominant in the marketplace, SMAs could see heightened demand due to their ability to tailor investments to personal values more explicitly than mutual funds.

Advisor Business Models: The business strategies of financial advisors and wealth management firms—whether they continue to shift towards fee-based models over commission-based structures—will also play a significant role. This shift could affect the prevalence of SMAs, as they are often more compatible with a fee-based advisory model.

• Market Performance of SMAs vs. Mutual Funds: Continuous tracking of the performance differential between SMAs and mutual funds will be crucial. Superior performance of either could sway investor preferences significantly.
• Investor Education and Awareness: Increased awareness and understanding of different investment vehicles can lead to more informed decision-making by investors. If the trend of rising investor education continues, we might see more nuanced and personalized investment choices, benefiting the growth of SMAs.

In summary, while the rise in SMA adoption marked a pivotal shift in investment strategies in 2022, the ongoing assessment of these variables is essential to predict their future role in wealth management. Whether this trend continues to ascend will depend largely on how these factors evolve. As we move forward, both industry observers and participants will need to keep a close eye on these developments to navigate the changing tides of investment preferences effectively.