What Is Separately Managed Account?
A separately managed account (SMA) is a professionally managed investment account that holds individual securities directly in the investor's name, rather than pooling assets with other investors. This contrasts with collective investment vehicles like mutual funds or exchange-traded funds (ETFs). SMAs fall under the broader category of portfolio management, offering a high degree of customization tailored to an individual investor's unique investment objectives, tax situation, and ethical preferences. Investors retain direct ownership and control over the specific holdings within their separately managed account.
History and Origin
The concept of separately managed accounts began to take shape in the 1970s as a solution for investors whose specific objectives could not be adequately met by the rigid structures of the mutual funds available at the time. In 1974, E.F. Hutton introduced "consulting services accounts" to retail customers, a pioneering step for the separately managed account concept.8 These early managed accounts were initially geared towards high-net-worth individuals due to the substantial minimum investment thresholds required. Over time, technological advancements and increased efficiency in portfolio administration have made SMAs more accessible to a broader range of affluent investors.
Key Takeaways
- A separately managed account (SMA) is a personalized investment portfolio managed by a professional, where the investor directly owns the underlying securities.
- SMAs offer greater customization, transparency, and potential tax efficiency compared to pooled investment vehicles.
- Historically, SMAs required high minimum investments, but these thresholds have generally decreased.
- Fees for separately managed accounts can be higher and more complex than those for mutual funds or ETFs, reflecting the individualized service.
- The Securities and Exchange Commission (SEC) requires investment advisors to report detailed information about their separately managed accounts on Form ADV.
Interpreting the Separately Managed Account
A separately managed account provides investors with a transparent view of their holdings, as they directly own each security within the portfolio. This direct ownership is a key differentiator, allowing for a precise understanding of the portfolio's composition and the ability to implement specific investment strategy adjustments. For example, if an investor has concentrated stock positions from employment, their SMA can be designed to avoid those specific equities, helping to enhance overall portfolio diversification. The management of an SMA often involves an investment professional or a financial advisor who makes day-to-day trading decisions in line with the agreed-upon investment mandate.
Hypothetical Example
Consider Jane, an investor who recently sold a business, resulting in a significant capital gain and a substantial amount of cash. She seeks an investment solution that can be tailored to her specific needs: a long-term growth strategy, avoidance of certain industries for ethical reasons, and a desire for tax-loss harvesting opportunities.
Jane approaches a brokerage firm that offers separately managed accounts. After discussing her investment objectives and tax situation, the firm's investment manager crafts a customized SMA for her. The portfolio consists of a mix of individual stocks and bonds, excluding tobacco and fossil fuel companies as per Jane's request. Throughout the year, if certain holdings decline in value, the manager can sell them to realize a loss, which can then be used to offset other capital gains, a process known as tax-loss harvesting. This level of granular control and tax efficiency would be difficult to achieve within a pooled investment vehicle where individual securities are not directly owned.
Practical Applications
Separately managed accounts are widely used by investors seeking highly personalized and tax-efficient portfolio solutions. They are particularly relevant for high-net-worth individuals, families, and institutions that require bespoke investment strategy implementation. A significant factor contributing to their increasing popularity is the rising demand for personalized investment solutions and advancements in portfolio management tools.7 Assets under management in SMAs reached $2.4 trillion in the first quarter of 2024, marking a substantial increase from previous years.6 This growth reflects the ability of separately managed accounts to cater to specific requirements, such as integrating environmental, social, and governance (ESG) criteria, managing concentrated stock positions, or facilitating advanced tax efficiency strategies like tax-loss harvesting. The Securities and Exchange Commission (SEC) also collects detailed information on separately managed accounts through Form ADV filings, enhancing transparency and aiding in risk assessment.5
Limitations and Criticisms
Despite their advantages, separately managed accounts come with certain limitations and potential criticisms. One significant factor is the typically higher minimum investment requirement compared to mutual funds or ETFs, which can restrict accessibility for investors with less capital. Fees associated with SMAs can also be higher and more complex, often including a management fee, a financial advisor fee, custodial fees, and trading costs.4 Average fees for SMAs can be around 1.44% overall, including advisor and asset management fees, which is generally higher than mutual fund and ETF fees.3 This can result in higher overall costs.
Additionally, while SMAs offer greater customization, they may offer less inherent portfolio diversification than large mutual funds or ETFs which hold hundreds or thousands of different securities.2 Investors in an SMA are reliant on the expertise of a single manager, and if not structured carefully, a separately managed account might closely resemble a mutual fund without providing the full benefits of personalization.1 Selecting the right manager and continually monitoring their performance fees and adherence to the investor's asset allocation and investment objectives is crucial and requires diligence.
Separately Managed Account vs. Mutual Fund
The fundamental difference between a separately managed account (SMA) and a mutual fund lies in asset ownership and customization. In an SMA, the investor directly owns the individual securities within the portfolio. This direct ownership allows for a high degree of customization, enabling the manager to tailor the portfolio to the investor's specific preferences, tax situation, and ethical considerations. The investor has full transparency into each holding.
Conversely, with a mutual fund, investors own shares of the fund itself, which in turn owns a diversified portfolio of securities. Investors do not directly own the underlying assets. This pooled structure means less personalization, as the fund's investment strategy is set for all investors, and individual tax-loss harvesting is not possible at the investor level. While mutual funds typically have lower minimum investments and broader inherent portfolio diversification, they offer less control and transparency over individual holdings than a separately managed account.
FAQs
Q: Who typically uses separately managed accounts?
A: Separately managed accounts are often used by high-net-worth individuals, institutions, and other sophisticated investors who seek personalized investment management, direct ownership of securities, and advanced tax efficiency strategies.
Q: Are separately managed accounts more expensive than mutual funds?
A: Generally, yes. Separately managed accounts typically involve higher fees due to the individualized service, direct ownership, and bespoke management. These fees can include management fees, financial advisor fees, and custodial charges, which often sum to a higher overall cost than the expense ratios of many mutual funds or exchange-traded funds.
Q: What are the main benefits of a separately managed account?
A: The primary benefits of a separately managed account include direct ownership of securities, allowing for enhanced transparency and control; the ability to customize the portfolio to align with specific values or avoid certain holdings; and opportunities for personalized tax efficiency strategies like tax-loss harvesting.