What Is a Separately Managed Account (SMA) in Investing?
Understand Separately Managed Accounts (SMAs): a sophisticated approach to building and managing a personalized investment portfolio.
Separately Managed Accounts (SMAs) offer a personalized approach to portfolio management. Understanding SMAs is valuable for individuals seeking a tailored investment strategy. This article explains what SMAs are, how they operate, how they differ from other common investment products, and for whom they are most suitable.
Defining Separately Managed Accounts
A Separately Managed Account (SMA) is a professionally managed investment portfolio where an individual investor directly owns the underlying securities. Unlike pooled investment vehicles, the assets within an SMA are held in the investor’s name, providing direct ownership of each stock, bond, or other security. This distinguishes SMAs from structures where investors own shares of a fund.
Professional investment managers oversee SMAs, making investment decisions on behalf of the client. This involves selecting individual securities that align with the investor’s specific financial goals, risk tolerance, and preferences. The portfolio is customized for a single client, adapting the investment strategy to their individual circumstances.
How SMAs Function
SMAs operate by granting a professional investment manager discretion to manage a client’s portfolio of directly owned securities. The manager constructs the portfolio by selecting individual stocks, bonds, or other investments based on the agreed-upon investment objectives. This process reflects the investor’s unique financial situation and risk profile.
Once established, the investment manager continuously monitors the portfolio, making ongoing adjustments such as buying new securities, selling existing ones, and rebalancing asset allocations. These decisions aim to optimize the portfolio’s performance while adhering to the client’s specific guidelines. Clients receive regular statements detailing every holding, providing clear transparency into the portfolio’s composition.
Compensation for managing an SMA is an asset-based fee, calculated as a percentage of total assets under management (AUM). These fees commonly range from 0.20% to 1.5% annually. This fee structure covers professional management, trade execution, and administrative services associated with the account.
Distinguishing SMAs from Other Investments
Separately Managed Accounts differ from pooled investment vehicles like mutual funds and Exchange Traded Funds (ETFs) in several key areas. With an SMA, investors directly own each individual security in their portfolio. In contrast, mutual fund and ETF investors own shares of the fund itself, which holds a diversified basket of securities.
This direct ownership in an SMA allows for a high degree of customization, enabling investors to tailor their portfolios to specific preferences, such as excluding certain industries or aligning with environmental, social, and governance (ESG) criteria. Mutual funds and ETFs offer standardized portfolios, limiting individual customization.
The direct ownership structure of SMAs also provides distinct tax management advantages. Investors can implement individual tax-loss harvesting strategies, selling specific securities at a loss to offset capital gains and potentially reduce taxable income. This is not feasible in pooled funds, where capital gains are distributed to all shareholders, regardless of their individual investment timeline. SMAs do not have the embedded capital gains issues often found in mutual funds, as the cost basis is individual to the investor.
Transparency is another differentiating factor. SMA investors have full visibility into every security held in their account and can track individual transactions. While mutual funds and ETFs disclose their holdings, this information is often delayed or presented at the fund level, providing less granular insight into the specific underlying securities.
Who Benefits from SMAs
Separately Managed Accounts are suitable for investors with substantial assets who seek a personalized and tax-efficient investment solution. SMAs often have higher minimum investment requirements, typically starting from $100,000. This makes them appealing to high-net-worth individuals and institutions.
Investors who prioritize direct ownership and greater control over their holdings find SMAs beneficial. This includes those with specific ethical or social considerations, allowing them to exclude investments in certain sectors or companies. The ability to implement advanced tax management strategies, such as individual tax-loss harvesting and avoiding embedded capital gains, is a significant draw for those with taxable investment accounts. SMAs provide an institutional-quality solution for individuals seeking tailored investment strategies and transparency in their portfolio.