How RIAs Can Transform Their SMA Business with ETFs

Billions of dollars continue to migrate into ETFs each year as advisors and institutions favor vehicles that offer transparency, liquidity, and operational efficiency. But there's another opportunity sitting inside many advisory firms that few are talking about: large pools of separately managed account (SMA) assets that were built over years yet remain locked in structures that are increasingly difficult to scale.

For many RIAs, SMAs represent intellectual capital at its finest. These portfolios reflect investment insight, disciplined process, and client trust. Yet they also carry growing operational friction. As the ETF ecosystem matures, advisors with sizable SMA books are beginning to ask a practical question: Is there a way to modernize these strategies without disrupting clients or triggering unnecessary taxes?

Section 351 of the Internal Revenue Code provides a compelling answer. When structured properly, a 351 conversion allows advisors to move securities from SMAs into an ETF structure without creating a taxable event for clients.

For RIAs willing to explore it, the 351 conversion represents a strategic lever to help improve efficiency, reduce costs, and position their practice for long-term growth.

Why Convert into an ETF?

At its core, a 351 conversion is a tax-deferred exchange.

Securities held in SMA accounts are contributed into a newly formed ETF in exchange for shares of that ETF. Clients receive ETF shares representing their proportional ownership of the contributed assets, and the transaction is not taxable when executed correctly.

Think of it as changing the container without changing the contents. The holdings move intact, and the investment philosophy remains unchanged.

The timing for this approach has become increasingly favorable. RIA adoption of ETFs has accelerated as regulatory frameworks have expanded and operational infrastructure has improved. Semi-transparent and non-transparent ETF structures have opened the door for active strategies that once hesitated to enter the ETF market. Custodians and technology platforms now support conversion workflows that were far more cumbersome even a few years ago.

Meanwhile, the pressures associated with traditional SMA management continue to mount.
Rebalancing across dozens of accounts. Managing tax lots. Coordinating trades. Overseeing compliance. All of it consumes time and resources. Client expectations rise while margins compress, forcing advisors to reevaluate whether this model remains optimal for growth.

Here's what matters most: a 351 conversion does not require abandoning successful strategies. Advisors who have built strong SMA models do not need to start over. The conversion simply allows those strategies to be delivered in a more efficient and modern structure.

Why This Matters to Your Bottom Line

Even well-run firms face operational complexity as assets grow. Every portfolio adjustment requires multiple trades across client accounts. Every rebalance introduces the risk of inconsistency. Every system added to manage the process creates another layer of oversight.

An ETF wrapper consolidates these activities.

Rebalancing? It happens once at the fund level rather than across individual accounts. Portfolio changes? Implemented with a single set of trades. The operational simplification alone is meaningful.

Consider the trading costs. A $75 million equity strategy spread across 25 client accounts can generate 500 to 1,000+ individual trades annually. Even at modest commission rates, these costs accumulate over time, creating performance drag that's easy to overlook. ETFs centralize trading activity, which can result in lower aggregate transaction costs and reduced market impact.

Your operational and compliance burdens decline alongside trading activity. Fewer trades mean fewer opportunities for errors and simpler audit trails. Reporting becomes more streamlined. Your team spends less time managing processes and more time focusing on client relationships and business development. What once consumed 10-15 hours per week in trade coordination and reconciliation can now take 2-3 hours.

What do clients get out of this?

ETFs deliver improved liquidity and intraday trading flexibility. Fee transparency improves as costs are no longer embedded in layers of transactions. Tax efficiency gets enhanced through the ETF creation and redemption mechanism, which allows for more effective management of capital gains over time.

The strategic implications extend beyond efficiency.

Competitive positioning is shifting as ETFs become the default vehicle for many allocators. Investors increasingly expect strategies to be offered in ETF form. Advisors without that capability find themselves excluded from consideration before performance is even evaluated.

Three Questions That Come Up in Every Conversation

Customization is usually the first concern.

Many RIAs built their reputation on tailored portfolios, and there's understandable hesitation about moving toward standardized vehicles. You're probably thinking: what about my clients who specifically came to me for customization?

Most SMA strategies already follow rules-based processes that translate well into ETF structures. For the largest and most complex relationships, SMAs can remain in place. In many cases, one or multiple ETFs can serve as the efficient core of a client’s portfolio, allowing advisors to focus on customization for other aspects of the relationship, such as asset allocation, tax planning, real estate or private investment decisions.

Tax implications create the second major hesitation. Clients hold appreciated positions, and advisors worry about triggering gains. 
Properly structured 351 conversions are designed to be tax-neutral at the point of conversion. Cost basis carries over, and tax liability is deferred until ETF shares are sold.

It is also worth recognizing why many advisors have historically positioned SMAs as tax efficient solutions. During periods of market volatility, SMAs allow for security level tax loss harvesting, which can offset gains elsewhere in a client’s balance sheet. Over time, however, those losses are often fully utilized. At that point, ongoing rebalancing, cash flows, and strategy changes within an SMA can begin to generate taxable events with fewer offsets available. 

In that context, a 351 conversion can represent the next phase of tax management, allowing portfolios to transition into a structure that is often more tax efficient for long-term investors without forcing liquidation.

The third barrier feels like the biggest: complexity.

The idea of coordinating legal, tax, operational, and client communication efforts seems daunting. However, experienced providers have developed processes to manage these transitions. Advisors do not need to become ETF specialists overnight. They need partners who understand the mechanics and guide the process smoothly.

Your First Conversion: Where to Start

Before diving into execution, it's important to recognize that not every SMA strategy is suited for ETF conversion. Highly concentrated portfolios or those dependent on illiquid securities are better suited to remain as SMAs. Understanding where a conversion makes sense is the first step.

For strategies that do fit, the process begins with a candid assessment of your existing SMA book.

Identify strategies with sufficient scale, consistent rules-based processes, and diversified client participation. In many cases, the strongest candidates are portfolios with significant assets, minimal client-specific variation, and operational alignment across accounts, including assets held at a single or a limited number of custodians, whether those assets sit across multiple accounts or a small number of large relationships.

Operational costs deserve close examination. Trading expenses, platform fees, compliance overhead, and staff time add up to more than expected. Quantifying these costs clarifies the potential return on a conversion.
Choosing the right partners is critical.

ETF service providers with direct experience in 351 conversions anticipate challenges and help streamline execution. Legal and tax advisors should have specific expertise in conversion structures, not just general securities knowledge. Custodian support and platform compatibility must also be confirmed early in the process.

Client communication should be intentional, and context driven. Advisors experienced with 351 conversions approach these discussions differently depending on their client base.

Some frame conversions within ongoing conversations about portfolio efficiency and scalability. Others introduce the concept when operational or tax challenges surface organically in client reviews. The timing and approach vary based on client sophistication, portfolio complexity, and where they are in their broader financial planning journey.

What experienced advisors emphasize is alignment with existing conversations rather than introducing 351s as a standalone initiative. For clients already engaged in discussions about tax planning, or operational efficiency, the conversion concept integrates naturally. For others, it may be better suited to a future conversation when circumstances make the benefits more immediately relevant.

Rather than prescribing a specific approach, consider how different client segments in your book might respond to various entry points. The goal is to help clients understand why a structural change makes sense for their specific situation.

The Choice Ahead

We believe the RIA industry ten years from now will be divided into two camps: advisors who modernized their delivery infrastructure and advisors who kept explaining why they hadn't.

SMA strategies are built through years of disciplined work with real client relationships, high-quality insights and proven track records.

The 351 conversion preserves that work while removing the operational drag that prevents you from scaling it.

Advisors who evaluate their SMA books with a strategic lens, engage experienced partners, and act deliberately will be positioned for sustainable growth. Those who wait will watch their operational costs compound while their competitors pull ahead.

The question isn't whether this shift is coming. ETF adoption among RIAs has already answered that. The question is whether you'll lead it or follow it.

Your investment strategies deserve a structure that supports their full potential. For many advisory firms, the 351 conversion is exactly that structure.