Three Reasons Why Dimensional SMAs Are Worth Your Attention

Two and a half years after launching its low-minimum separately managed account (SMA) offering, Dimensional manages over $2 billion across more than 700 accounts,¹ having doubled both the assets and accounts under management in 2023. Here is why we believe many financial advisors have started using our SMAs and why you might also consider them.

When Dimensional launched its low-minimum SMA offering, a key motivation was helping advisors do better than so-called “direct indexing” products, which dominated the SMA landscape. Unlike direct indexing, Dimensional SMAs do not start with an outsourced index, like the S&P 500. Our core equity SMAs start with a thoughtfully designed and broadly diversified investment universe that allows for tax-efficient implementation. Within that universe, Dimensional SMAs emphasize companies with higher expected returns through a daily, flexible investment process, avoiding the rigidities and potential inefficiencies of an index approach. For example, we systematically use the proceeds from harvesting losses to buy stocks with higher expected returns, rather than to minimize tracking error by trying to ensure our holdings precisely match an index’s.

And this leads us to another crucial difference from direct indexing—Dimensional SMAs are not distracted by the tradeoff between managing taxes and minimizing tracking error against an outsourced index. Instead, they focus on the tradeoff that we believe really matters: between taxes and expected return premiums.² So a Dimensional SMA might completely sell out of a name if this can lock in large capital losses without negatively impacting the expected return of the portfolio. A direct indexing product might not be able to do this if that name has a large index weight.

Many SMA offerings out there are all about tax loss harvesting. But that is only one way to add value in a tax-managed SMA. Dimensional SMAs apply multifaceted tax management³ that seeks not only to systematically harvest meaningful losses but also to minimize and defer capital gains when rebalancing toward higher expected returns. Our tax management approach can also help investors maximize the qualified portion of dividend income and manage wash sales within and across linked accounts. Dimensional SMAs can also proactively alert for gifting opportunities around corporate actions.

SMAs allow advisors to offer personalized investment solutions. Yet personalization requires time and effort to design, launch, and manage each client account. Dimensional offers an intuitive and easy-to-use SMA portal and hands-on support through our SMA Solutions team. This dedicated team of specialists can walk you through the results of a complex tax transition analysis or periodic portfolio performance reviews. The team supports advisors setting up SMA custody accounts for the first time and initiating bulk conversions from other managers. SMA Solutions can also describe options available to you if your client wants to harvest gains or additional losses, apply a new security restriction, raise cash, or add Dimensional ETFs to the portfolio. What is the typical response time for a service request? Fifteen minutes. As with everything else we do at Dimensional, we strive to provide a truly outstanding advisor experience.

In addition to the above, in January 2023, we added the ability to include Dimensional ETF positions in the account target asset allocation for most Dimensional SMAs.⁴ This essentially transformed our SMAs into UMAs (unified managed accounts). We believe there are several benefits of integrating ETFs alongside direct security holdings in one account, including holistic tax management across the overall portfolio, greater asset class flexibility in portfolio construction, and enhanced operational efficiency for the advisor. We continue to innovate to provide an SMA platform designed for easy integration into an advisor’s business and a high level of personalization for investors.