Making Sense of Separately Managed Accounts and Individually Managed Accounts

Individually Managed Accounts (IMAs) and Separately Managed Accounts (SMAs) both offer investors a highly transparent managed share portfolio while avoiding the tax distortions that come with pooled investment vehicles such as managed funds.

However, there are some important differences between individually and separately managed accounts and while they may sound very similar, these differences can have a significant impact on investment performance, suitability, and tax effectiveness.

In General, Separately Managed Accounts are a good alternative to managed funds for many investors, while investors with $1 million or more, are likely to find the features of an IMA more compelling.

The key differences between the two types of managed accounts rests in their approach to building an investment portfolio.

SMAs are constructed with a ‘model portfolio’ where each investor receives precisely the same portfolio, based on a template created by the fund manager. IMAs however, are constructed individually for each investor, although each account will share some common holdings. These two approaches have some important differences:

Investors in a SMA may buy stocks that have already enjoyed most of their returns, but remain in the model portfolio to avoid realising capital gains tax. IMA investors however will receive a portfolio that is assembled incrementally, as attractive opportunities arise.

For the same reason, new investors in Separately Managed Accounts will receive a larger position in stocks that have already performed well, while IMA investors are likely to receive larger holdings in stocks the investment manager believes will perform well in future.

IMAs also provide the ability to tailor the portfolio to the investor’s circumstances. For instance, an IMA manager may place more weight on generating franked dividends for a SMSF, while long term capital appreciation could be more valuable for an investor with a high tax rate. These differences in investment management help produce good after tax results for each investor. Since every investor in a SMA receives the same portfolio, the Separately Managed Account manager cannot factor individual considerations into their management.

Both structures will allow the transfer an existing portfolio, with the IMA providing some additional flexibility and tax advantages. When importing an existing portfolio into a SMA, only those shares contained in the model portfolio will be retained and only to the proportion held in the model portfolio. Therefore, investors may still realise capital gains when entering an SMA. Conversely, a diligent IMA manager will adapt the existing portfolio over time and with consideration to tax events.

Both offer tax effective investment management to tax conscience investors.

For investors wishing to exclude individual stocks or sectors, an Individually Managed Account manager will hold alternative positions, while the SMA will generally hold cash in lieu of the excluded positions. This can have a significant impact on the portfolio’s overall returns.

In executing trades, SMA investors will generally receive ‘at market’ prices on their transactions, while an IMA manager may attempt to get best execution and/or exercise discretion over the timing of buys and sells.

Service levels are also different, with holders of Separately Managed Accounts receiving a service akin to a managed fund. while those using Individually Managed Accounts have ongoing access to the fund manager responsible for their portfolio and will likely receive personalised reporting.

How Good Property Management Training Can Change Tenant Behavior

Some would say that part of property management training that involves dealing with tenants is more art than science, and with that I’d have to agree.

I’ve been actively managing people and managing property for almost 30 years and, knock on wood, probably 99% of the time things go very smoothly.

But that 1% is what really makes you sit down and think hard about what’s going wrong with your management training.

How To Learn From The 1%

Maybe I’m lucky, but when I manage people things go pretty well. The group is cohesive, there’s not too much drama or politics, and everybody is moving toward the same goal. Same thing is true about our property management training classes.

But there’s the occasional employee that no matter what you do simply won’t cooperate.

And the weird thing is, these people tend to be the smartest ones in the bunch.

So what gives?

When we’d get together for the employee review I’d actually ask this question point blank and the employee would tell me exactly what they were doing wrong.

Which would baffle me. I mean, if you know what you’re supposed to do and if you know what you’re doing wrong, how hard is it to change your behavior?

That’s Your Job Not Mine

The answer I’d always receive from this 1% is that while they know all of this, that it was my job as a manager to change their behavior, not theirs.

Managing tenants isn’t quite the same thing as managing employees, but they’re both people, and like they say, people will be people.

One of the most effective property management training tools I’ve found to change tenant behavior is to set the right expectations.

Tenant-Friendly Leases

Often we’ll be managing a multi-tenant real estate investment with leases already in place that bind the new owner to promises made by the previous owner. Many times, for whatever reason, these leases are overly tenant-friendly, to the point that the previous landlord has actually given up rights that she’d normally be entitled to.

I see this with the rent due date a lot of times. For example, if by law and by a standard lease contract the rent is due on the 1st and delinquent on the 5th, I’ll see the delinquent date stated as the 10th in the lease.

Clearly this can wreak havoc with your cash flow, particularly in the case of tenants that push the envelope, and the 10th can quickly become the 15th. If you’ve got a mortgage on the property, odds are your payment is due before the 15th.

Would You Rather Be Paid Now Or On The 15th?

Assuming you can’t amend your existing leases, the easiest way to improve your cash flow and get more of your rents coming in by the first is to send out monthly billing statements at lease a week before the due date of the 1st of the month with a note on the statement that rent is due on the 1st.

If needed, send a follow-up statement on the 5th as a reminder that rent is due on the 1st, or make a follow-up phone call or visit to the tenant, to make sure that the tenant received the statement.

Don’t say anything about the due date of the 1st.

You’d be surprised at how effective this simple property management training tool can be.

We’ve taken over the management of many properties that have leases like this, and usually within two months of using this technique almost all of the tenants are paying by the 1st or even sooner.

Sugar Is Better Than Spice

The nice thing is, we didn’t have to coerce, didn’t have to threaten, and didn’t have to charge late fees.

For the price of a first class stamp, a piece of paper for the statement and some printer ink, we were able to move the majority of our cash receipts up by 10 days.