ETF Tax Benefits Drive Growth in SMA Conversions
- Advisors convert SMAs to ETFs for tax and operational advantages.
- Tax minimization ranks as top priority for wealthy clients.
- The potential conversion market exceeds $2.7 trillion in assets.
The tax efficiency offered by exchange-traded funds has made them the structure of choice for advisors looking to convert separately managed accounts, a trend accelerating as client wealth grows, according to a new report from Cerulli Associates.
"Given the increased wealth of retail investors, Cerulli expects advisors to continue focusing more on tax minimization solutions—and transferring separately managed account (SMA) assets to the ETF structure may be one component," according to the April 2025 edition of The Cerulli Edge—U.S. Asset and Wealth Management Edition.
In 2017, 29% of high-net-worth-focused practices offered tax planning guidance, according to the report. That share grew to 45% as of 2023. In a 2024 Cerulli survey, HNW practice management executives ranked tax minimization first, alongside wealth preservation, as what they perceive as their clients' most important objectives, with 73% rating these factors very important.
While tax efficiency drives much of the interest in SMA-to-ETF conversions, operational benefits also play a crucial role, the report indicates.
"The use of the ETF structure may allow for more streamlined purchase of securities and negates the necessity to distribute them among accounts—a challenge that grows alongside the number of accounts, strategy complexity, and declining minimums for who can access SMAs," Daniil Shapiro, director at Cerulli Associates, said in a press release.
Even when ETFs are created primarily for a firm's existing clients, the structure solves important operational challenges. "It has been suggested that ETFs may help an advisor generate hundreds of thousands in cost savings," Shapiro added.
Market Size and Growth Potential
The potential market for SMA-to-ETF conversions is substantial but still developing, according to Cerulli's research. The firm estimates the total industry figure for SMAs at $2.7 trillion, with $1.6 trillion in wirehouses and another $484 billion within the registered investment advisor channel.
Currently, 45% of advisors report using separate accounts, compared to 90% using ETFs, the report states. The average SMA allocation for an advisor is 7.7%, though this varies by practice size. Advisors with $500 million and up in practice assets report a 12% allocation to SMAs, which they plan to increase to 15% through 2026.
"It is possible that while the initial conversion discussions are focused on the benefits for RIAs, a broader pool to target may exist in the wirehouse channel," noted Shapiro.
SMA Conversion Challenges
Despite the growing interest, Cerulli identified price and scale as key challenges to these conversions, according to the press release.
"With ETF launch costs and annual operating costs each running in the hundreds of thousands of dollars, wealth management firms will have to put up meaningful assets for each conversion to an ETF for it to be attractive," said Shapiro.
The activity is already gaining momentum in the marketplace, with the March 2024 conversion of Eagle Capital Management's $1.8 billion separate account into the Eagle Capital Select Equity ETF (EAGL) sparking industry interest, according to the report.
Other firms like Rockefeller Capital Management have already launched ETFs with assets nearing $2 billion, showing how quickly this strategy is moving from concept to real-world implementation.
