What Are Separately Managed Accounts (SMAs)?

Separately Managed Accounts (SMAs) offer a tailored approach to investment management, distinct from more common pooled investment vehicles. An SMA represents a professionally managed portfolio of individual securities directly owned by the investor. This structure provides a personalized strategy for wealth management, catering to specific financial goals and preferences.

What Separately Managed Accounts Are

A Separately Managed Account is an investment portfolio overseen by a professional money manager. Unlike mutual funds or exchange-traded funds (ETFs), where an investor owns shares of a collective pool, an SMA grants the investor direct ownership of the underlying individual securities such as stocks and bonds. This direct ownership differentiates SMAs from pooled investment vehicles.

The professional money manager makes investment decisions on behalf of the client, aligning the portfolio with the client’s stated objectives and risk tolerance. This personalized management contrasts with standardized mutual fund portfolios designed for a broad investor base. SMAs are customized specifically for a single client’s needs, allowing for a tailored investment strategy. The manager has discretion to make decisions unique to that account, rather than decisions that apply uniformly to all investors in a pooled fund.

How Separately Managed Accounts Work

A Separately Managed Account involves a clear relationship among the investor, the investment manager, and a third-party custodian. The investor grants discretionary trading authority to the investment manager, allowing the manager to execute trades within the investor’s account without requiring approval for each transaction. This authority is guided by an Investment Policy Statement (IPS).

The IPS is a foundational document that outlines the investor’s financial goals, risk tolerance, and any specific investment constraints, such as ethical investing preferences or restrictions on certain industries. The investment manager uses this statement to guide all portfolio decisions. A third-party custodian holds the assets, providing security and oversight for the investor’s holdings. Regular reporting from the manager keeps the investor informed about portfolio performance, holdings, and trading activity.

Distinctive Features of Separately Managed Accounts

Direct ownership of individual securities within an SMA offers transparency into specific holdings. This direct ownership also enables the implementation of specific tax strategies, such as tax-loss harvesting, where individual securities with unrealized losses can be sold to offset capital gains. Investors maintain an individual cost basis for each security, which is essential for precise tax management.

SMAs offer customization, allowing portfolios to be tailored to individual investor needs. This includes the ability to exclude certain investments or industries based on personal values, such as socially responsible investing (SRI) criteria. Investors can also incorporate specific concentrations or avoid overlapping positions with other investments they may hold. This level of personalization is generally not available in pooled investment vehicles.

Professional management in an SMA means a dedicated team actively makes investment decisions for the portfolio. This includes continuous monitoring of market conditions and adjusting holdings to meet the investor’s evolving financial objectives. Transparency in SMAs extends beyond just holdings, encompassing transaction activity and fee structures, which are typically itemized separately on account statements. This provides investors with a clear understanding of their portfolio’s composition and costs.

Investor Considerations for Separately Managed Accounts

Separately Managed Accounts typically have higher minimum investment requirements compared to mutual funds or ETFs. While some providers offer minimums starting around $50,000 to $100,000, many may require $250,000 or more, making them generally more suitable for high-net-worth individuals. Minimums can also increase if an investor seeks exposure to multiple investment styles or strategies, potentially requiring separate SMAs for each.

Fee structures for SMAs are commonly charged as a percentage of assets under management (AUM), often ranging from 0.20% to 3.1% annually. These fees typically cover portfolio management, research, and trading costs, though some firms may have additional charges. SMA fees can be higher than the expense ratios of passively managed mutual funds or ETFs, reflecting the personalized nature of the service.

SMAs are particularly suited for investors who seek personalized strategies, direct ownership of securities, and specific tax management capabilities, such as tax-loss harvesting. They appeal to those who value greater control over their asset selection and transparency into their holdings. Potential investors should conduct thorough due diligence when selecting an investment manager, evaluating their qualifications, experience, and historical performance.