If you believe your investment decisions deserve your direct involvement, a transaction-based municipal bond Separately Managed Account (SMA) may be the right choice. Rather than delegating all trading decisions under an annual fee-based discretionary account, you retain control over purchases and sales while receiving professional advice research, and execution from municipal bond specialists. It’s an approach designed for investors who value both expertise and personal involvement.

For almost five decades GMS has offered Non-Discretionary Transaction Based SMAs to High-Net-Worth investors. A GMS Municipal Bond SMA offers investors the opportunity to own a customized portfolio of individual municipal bonds, the investor approves each transaction before it is confirmed and does not pay an annual fee on the value of the entire SMA. An annual fee on the entire SMA can cost the investor as much or more than 10% of the SMA’S annual income.

An illustration of the cost of a hypothetical Discretionary Annual Fee Based municipal bond SMA is very informative: A $10,000,000 municipal bond SMA earning 4.5%, produces $450,000 of annual tax- free income. Assuming a management fee of 50-basis points which equates to around $50,000. The return on the Fee-Based SMA is no longer 4.5% it is now 4%. The $50,000 management fee equates to over 11% of the SMAs $450,000 of tax-free income. The fee is an important consideration and a point that is often overlooked. When considering a 50-basis point fee on the entire SMA portfolio the difference in cost between a Fee Based and Transaction Based SMA can be very significant.

Both Fee Based and Transaction Based SMAs are managed to include:
1.) Increasing tax exempt income.
2.) Executing tax-loss swaps while maintaining similar income and credit quality.
3.) Upgrading credit quality when opportunities arise.
4.) Extending call protection to reduce reinvestment risk.
5.) Adjusting duration or sector exposure as market conditions or interest rates change.
6.) The municipal bond market is an inefficient over the counter market. A municipal bond specialist can find undervalued and mispriced bonds, attractive callable structures, tax efficient enhancements, etc.

The advantages of a Transaction Based SMA:
A.) By approving each transaction client retains complete control over purchases and sales.
B.) Less expensive if an investor leans towards buy / hold, approves only advantageous swaps.
C.) No ongoing annual fee on SMA assets, client only pays transaction fees. **
D.) Many individuals prefer approving every trade, do not want to be a passive investor.
E.) Could be considerably less expensive than a fee-based account if approved investor transactions amount to around or less than 30% of the entire SMA value per year.

Which is The Better SMA… Fee Based or Transaction Based?
Neither is universally better. It depends on the needs of the investor. Both Discretionary Fee Based and Non- Discretionary Transaction Based SMA managers work to accomplish the investor’s fixed income objectives. By framing a Non -Discretionary Transaction Based SMA, GMS makes a case for a Transaction Based approach without implying it is superior. For investors seeking a passive approach with frequent discretionary rebalancing and ongoing discretionary oversight, an Annual Fee Discretionary Fee-Based SMA which does not require investor transaction approval may be the better fit.

Contact your GMS Municipal Bond Specialist for complete details
The information contained above is not an offer to buy or sell any securities. It does not purport to contain all available information on SMAs.

* Discretionary Fee Based: Predictable annual fee on the entire value of the SMA. Commonly between 25 -75 basis points, which includes ongoing discretionary portfolio management. SMA manager has authority to buy / sell without investor approval.

**Non-Discretionary Transaction Based: No annual fee, annual cost can be considerably less than fee based when a municipal bond SMA trades less than 30% of the SMA portfolio. Each transaction cost is a one-time expense, usually more or less than 1% dependent on the size of the transaction. Transactions are based on recommendations made by your assigned municipal bond specialist and approved by you. Since Transaction Based accounts are Non-Discretionary the investor controls the SMA by approving each transaction before purchase / sale.