Are Separately Managed Accounts Worth It?

Separately Managed Accounts (SMAs) represent an investment approach where a professional manager oversees a portfolio of individual securities directly owned by a single investor. This contrasts with pooled investment vehicles that combine assets from multiple individuals. This article explores the structure, costs, tax considerations, and suitability of SMAs.

Understanding Separately Managed Accounts

A Separately Managed Account is a personalized investment portfolio managed by a professional investment firm for an individual investor. Unlike mutual funds or exchange-traded funds (ETFs), an SMA grants direct ownership of the underlying securities. This direct ownership allows for a tailored investment strategy.

The professional manager operates under an investment policy statement, outlining the investor’s financial goals, risk tolerance, and specific preferences or restrictions. This allows for customization, meaning the portfolio can be adjusted to reflect individual mandates, such as excluding certain industries. The manager makes day-to-day investment decisions on behalf of the investor.

SMAs differ from pooled vehicles because assets are not co-mingled. Investment decisions are made solely for the individual account, enhancing transparency. This provides investors with a clear view of their specific holdings and trading activity.

Investment Requirements and Fees

Accessing a Separately Managed Account involves higher minimum investment thresholds compared to mutual funds or ETFs. These minimums can range from $50,000 to $500,000, depending on the firm and investment strategy. This reflects the personalized service and operational requirements.

The fee structure for SMAs is based on a percentage of assets under management (AUM), known as an advisory fee. This annual fee ranges from 0.20% to 2.0% of AUM. The percentage often declines as the amount of assets under management increases.

These AUM fees cover professional portfolio management, investment research, trading costs, and administrative services. Some firms use a “wrap fee” to bundle these costs into a single charge. SMA fees are transparent, deducted directly from the account and clearly shown on investor statements. This contrasts with mutual fund expense ratios, which are embedded within the fund’s net asset value.

Tax Implications of Direct Ownership

Direct ownership of securities within an SMA provides tax management opportunities unavailable in pooled investment vehicles. A primary advantage is the ability to implement tax-loss harvesting. This strategy involves selling individual securities at a loss to offset realized capital gains and potentially up to $3,000 of ordinary income annually. Any losses exceeding these limits can be carried forward.

SMA managers can also strategically manage capital gains distributions. Since investors directly own the securities, the manager can control the timing of sales to minimize taxable gains or structure sales over multiple tax years. This level of control is typically absent in mutual funds, which distribute capital gains to all shareholders.

Direct ownership allows for precise control over the cost basis of individual securities. An investor’s tax liability is based solely on gains and losses realized within their specific account, avoiding “embedded capital gains” from previous investors in a pooled fund. This prevents new investors from receiving a capital gains distribution soon after investing, even if the fund’s overall value has not increased for them.

Identifying Ideal Candidates for Separately Managed Accounts

Separately Managed Accounts are well-suited for investors with specific financial profiles. Individuals with higher asset levels find SMAs appealing due to customization and the ability to spread management fees over a larger portfolio, making fees more efficient. While minimums have decreased, SMAs remain primarily an option for affluent investors.

Investors seeking to align their portfolios with specific personal values, such as environmental, social, and governance (ESG) principles, or those who wish to avoid certain industries, benefit from SMA customization. The ability to exclude or favor particular securities provides a level of control unavailable in pooled investment products.

For those in higher tax brackets, the tax efficiency features of SMAs are advantageous. The ability to manage individual tax lots and offset gains can result in meaningful after-tax returns, preserving more wealth. This is a factor for individuals with complex tax situations or significant unrealized gains.

SMAs appeal to investors who desire transparency and direct control over their investments. Direct ownership means investors see every security held. They work closely with a dedicated professional manager who understands their financial landscape. This oversight provides a clear view of portfolio activity and ensures investment decisions reflect individual objectives.