How SMAs can create tax efficiencies at different life stages

The portability benefits of managed portfolios can reduce tax frictions

Managing your client’s risk profile throughout their investment journey is one of the most important ways you can add value as their trusted adviser.  

As you build up a long-term relationship, you’ll need to help them navigate life’s key milestones. 

• They may need to increase their risk profile towards the start of their investment journey.  
• They may need to play catch-up with a more risk seeking or active approach following a major life change such as separation or divorce. 
• And they may need to derisk their investments as they approach retirement.  

But whenever you adjust their portfolio, you’ll potentially need to sell down assets and reinvest, which may trigger a capital gains tax (CGT) event. 

The solution could be a separately managed account (SMA).

Also known as managed portfolios or managed accounts, some SMA portfolio ranges are constructed using common underlying holdings. This means that when you need to adjust your client’s portfolio, you can transfer those common holdings across in specie, potentially incurring a lesser CGT liability in the process. 

Here’s a practical example of how the in-specie transfer advantages of managed portfolios can help a client transition their portfolio towards retirement. 

How it works | Serena and Sean’s story

Let’s look at two hypothetical clients – Serena and Sean.

• Both Serena and Sean have $156,000 in super at age 40.
• They both hold the same portfolio comprised of 85% Growth assets and 15% Defensive assets. Crucially, Serena uses an SMA while Sean is invested in a managed fund.
• Fast forward to age 62 and both Sean and Serena have amassed a Super balance of $714,378 in today’s dollars.
• They both switch into a Balanced risk option (70% Growth assets) as part of a de-risking strategy.

Serena incurs $7,353 in CGT because she only needs to sell down a small proportion of her holdings to create the new Balanced portfolio asset mix. This is because the Diversified Index Growth portfolio has an 84% overlap of underlying holdings with the Diversified Index Balanced portfolio, meaning only 16% of her holdings need to be sold down to make the transition. The other 84% is simply ported across in specie, potentially saving her significant sums in CGT. 

Sean on the other hand, incurs $45,954 in CGT because he needs to sell down 100% of his holdings and reinvest the proceeds in a Balanced managed fund. 

As you can see in the graph below, the impact of this tax gap is even more pronounced when they both elect to retire at age 67. At this point, Serena has amassed $862,000 in Super compared to $819,000 for Sean – a difference of 5.2%, due to Serena’s use of SMAs. 

The scale of the in-specie transfer benefits for an SMA client will be contingent on how early a client begins their investment journey in SMAs, as opposed to products with less favourable tax treatments. It will also depend on their contributions and the returns generated by their portfolio holdings. All else being equal, however, the benefits conferred to the SMA investor can be substantial. 

These benefits also stack up favourably compared with other forms of investment value-add, such as lower fees, franking credits and active management alpha. 

So as can be seen here, utilising SMAs throughout the investment journey can potentially help you to manage inevitable changes to a client’s portfolio in a more tax-efficient manner. In doing so you could help maximise their investment outcomes. 

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Check out the MyNorth Diversified suite of 22 multi-asset portfolios across 3 core portfolio ranges; spanning fully passive through fully active investment strategies, that can help provide wealth and tax efficiencies throughout your clients’ investment journey.