Guest Columnist William DeSanto, Senior Vice President, Director of Product Management Seligman Advisors, Inc.

The number of products Financial Advisors can offer their clients has grown dramatically in recent years. One of the latest innovations -- the Unified Managed Account -- is gaining popularity and revolutionizing the client/advisor relationship. Never before have advisors been able to combine all of the various products offered by their firms in a single, fee-based account. However, one frequently overlooked product, which offers several benefits to both clients and advisors, is often left out of this cutting-edge tool: closed-end funds. Closed-end funds help advisors strengthen their relationships with their clients by offering:

• increased client yield,
• more reasonable entry points,
• advanced investment strategies,
• the potential to buy an actively managed portfolio at a discount to its NAV, and
• the ability to target specific areas for investment.

Closed-end funds have a unique ability to help financial advisors meet their clients’ sophisticated investment needs. Investor share redemption is not a concern for closed-end funds; as a result, portfolio managers can take a longer-term view when implementing their investment choices, and can elect to employ other, more sophisticated investment strategies. For example, the ability to use leverage or to write covered calls, or purchasing a stock while simultaneously selling a call option on that stock, can each help a portfolio manager to maximize the use of the fund’s capital. Closed-end fund managers have the necessary investment expertise to successfully implement these strategies and do not have to worry about having to liquidate an investment to meet sudden shareholder redemptions. Furthermore, because there is no minimum investment in closed-end funds, even small investors can access these strategies.

Like stocks, closed-end funds trade on a stock exchange and are continuously priced. Therefore, closed-end funds often can be purchased at discounts to their NAV (when the price of the fund is less than the value of its underlying securities). This can be a tremendous advantage for potential investors because it gives them the opportunity to invest in the market below market prices. Take, for example, a large-cap core equity fund that trades at a10% discount to its NAV.  Investors who buy shares in the fund get to invest in a portfolio of stocks at 10% below the stocks’ actual cost. 

For investors seeking income, buying a closed-end fund at a discount can also help them enhance the yield of their investment. If the fund in our example also pays a dividend, investors who buy their shares at a discount will also enhance their yield, because yield is calculated on actual dollars invested at a discount and not on the NAV. For example, assume a fund has an NAV of $20 per share and a market price of $18 a share and pays $1 of income a year.  The yield based on NAV is 5% ($1/$20), but because a closed-end fund yield is based on market price the actual yield received is 5.6% ($1/ $18).

There are other benefits to investing in closed-end funds as well. Many have clearly defined investment objectives which allow an advisor to match a client’s needs with the appropriate fund. Closed-end funds also give investors the ability to control the timing of their investments because orders can be placed throughout the trading day and limit orders can also be used to help control the price.

When closed-end funds are added to Unified Managed Accounts, advisors can provide their clients with many advantages that other investments simply do not offer. These advantages will, in turn, help advisors to set themselves apart from their peers. Advisors who can distinguish themselves as professionals who quickly and efficiently serve their clients' investment needs will be rewarded with stronger client relationships. In the end, this is something from which all advisors can benefit.

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