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Island Investing

Riffs, rants, and the upside of investing from way off Wall Street


Spoke Fund® versus Separately Managed Accounts

I’ve had some back and forth lately on another site about the differences between a Spoke Fund® and a SMA, or separately managed account. You can find the trail of comments at the bottom here. Well, except for the first comment, which I deleted, because I thought the poster was a crank.

In any case, he does have a good point – in nothing that I have put out is it clear how a Spoke Fund® differs from a separately managed account. While I don’t think most investors care at all about the differences, apparently at least one pseudo-anonymous broker does, and I suppose there could be other folks with a similar point of view. So…

Spoke Fund® versus a Separately Managed Account

Here is a good overview of SMAs. You’ll note that many of the advantages of investing in an SMA are similar to the advantages of investing in a Spoke Fund® – specifically, individual cost basis, direct ownership of shares, and portfolio customization. While I’d have to defer to an SMA expert to clarify this, I’d also be willing to assume that there are probably key similarities in technology, trading, and portfolio administration.

However, there are some key differences between the two as well:

– SMAs are sold by brokerages. Spoke Funds® are run by RIAs.

– SMA managers may or may not have a fiduciary responsibility. They may in fact be legally bound to put their employers’ interest above their investors’. Spoke Fund managers are fiduciaries. They are legally bound to put their investors interests above their own.

– SMAs afford investors the ability to use multiple managers. Spoke Funds do not.

– SMA investors may not have the ability to speak directly to their SMA manager. All Spoke Fund investors can speak 24/7 to their spoke fund manager.

– SMAs are often sold in conjunction with investment advice and/or other financial services. Spoke Funds are not.

– SMAs and in particular wrap accounts have high fees, many of which are hidden. Spoke Funds do not.

It’s also probably safe to say that SMA managers have little if any of their own net worth invested in the SMAs they manage. Spoke Fund managers have the majority of their net worths invested in the funds they manage. This is the key factor that distinguishes the two in my mind – and to investors, too, I believe. I think the better question is not “Is a Spoke Fund an SMA?” as much as it is “Why aren’t all SMAs Spoke Funds?”

Some of the things on the list above are certainly subjective, and others might change over time. The larger point, however, is that I think there are big enough differences between SMAs and Spoke Funds that the latter is worthy of its own category. It didn’t have one, and after banging my head against the wall for a bit, eventually came up with the term “Spoke Fund®.” But at this point, that term is much bigger than just me.

So, to sum up the ultimate difference between spokes and SMAs, I’d say it’s oranges and tangerines – same class, different species.

I suppose it’s possible that the better taxonomy for a Spoke Fund® might be as a sub-category of SMA, but I’ll leave that to others. That seems to me to imply a certain deference to Wall Street, and I’ll set my hair on fire and run naked down US-1 before I kowtow to those guys.

What do you think?