How a Separately Managed Account (SMA) Works

A separately managed account (SMA) is an individually tailored investment portfolio overseen by a professional asset manager on behalf of a individual investor. Unlike mutual funds, which pool assets, SMAs grant investors direct ownership of the underlying securities, enabling customized strategies and tax-efficient management. Typically available through wealth management firms, these accounts often have high minimum investment thresholds and appeal to those seeking personalized solutions and greater portfolio transparency.

A financial advisor can help you create a financial plan for your investment goals.

What Is a Separately Managed Account?

An SMA a professionally managed investment portfolio created to meet the specific financial goals, risk tolerance and preferences of a single investor. SMAs offer a bespoke approach, where the investor has complete control over the securities included in the account.

This gives you a bit more flexibility as to how those funds are invested and managed, as well as the transparency to monitor trades in real-time. This flexibility enables more precise tax strategies, such as harvesting losses to offset gains or optimizing the timing of transactions to reduce tax liabilities.

SMAs are managed by professional wealth managers who actively adjust the account’s holdings based on market conditions or the investor’s evolving financial objectives.. Fees may be higher than those associated with mutual funds, but it may be the case of you get what you pay for.

Example of a Separately Managed Account

Consider an investor named James, a high-net-worth individual nearing retirement, who prioritizes income generation and capital preservation. His SMA is structured to include high-quality corporate bonds, dividend-paying blue-chip stocks and a selection of municipal bonds for tax-free income.

To manage risk, the portfolio excludes speculative investments and maintains a diversified allocation across multiple sectors.

James values flexibility, so his asset manager actively reviews the account to ensure consistent income and adjusts holdings to respond to market changes. For instance, if interest rates rise, the manager might replace longer-term bonds with shorter-duration ones to reduce sensitivity to rate fluctuations. Additionally, any realized capital gains are strategically offset through loss harvesting, helping James manage his tax liability.

What Are the Benefits of a SMA?

Many investors are drawn to SMAs for their unique advantages. Below are some key benefits of this investment vehicle:

Tax benefits: SMAs can be managed to minimize taxes, such as reducing capital gains tax obligations by strategically selling securities at a loss to offset gains. This level of tax efficiency is often unavailable in pooled investment vehicles.
Control: SMAs provide individual investors with direct ownership of the securities in their portfolio, offering greater control over investment decisions compared to pooled vehicles like mutual funds or ETFs.
Transparency: Investors can see each trade and holding within their SMA, giving them a clear view of how their portfolio is managed and how their money is allocated.
Customization: Unlike pooled investments, which cater to the collective interests of a group, SMAs are specifically tailored to the preferences, goals and risk tolerance of the individual investor.
Independence from group decisions: The performance of an SMA is not influenced by the actions of other investors, unlike mutual funds where large redemptions by others can impact overall performance.

Potential Drawbacks of SMAs

SmartAsset: How a Separately Managed Account (SMA) Works

Separately managed accounts aren’t for everyone. Many financial institutions require a hefty minimum to open a SMA and may charge higher fees. Here’s a closer look at the potential pitfalls of SMAs.

High minimum investment requirements: SMAs typically have high account minimums, often starting at $100,000 or more, making them less accessible to smaller investors.
Higher fees: While fees vary, SMAs often come with higher management costs compared to mutual funds or ETFs. This is due to the personalized services and active management involved.
Complexity: The level of detail and customization in SMAs can make them overwhelming for some investors, requiring close collaboration with the manager to maintain alignment with financial goals.
Limited diversification for smaller accounts: While SMAs can be customized, accounts with smaller balances may struggle to achieve optimal diversification across multiple asset classes due to the higher cost of individual securities.

SMAs vs. Other Pooled Investment Vehicles

While there are various similarities between mutual funds and SMAs, there are a few key differences. Both are investment vehicles comprised of a collection of securities, such as stocks, bonds and other assets. However, when one invests in a mutual fund, their funds are pooled with those of other investors. The funds are then pooled and invested collectively into one fund and professionally managed by a money manager.

With SMAs, however, a single investor owns all the securities within the fund. That’s why they have more control and transparency when it comes to the way it’s invested and managed. This is also why it might be ideal for those with significant funds to invest. In short, mutual funds are owned by multiple investors, while SMAs are owned by one individual.

Additionally, while ETFs and SMAs are both collections of various securities, an ETF tracks an index so its holdings are more set. Alternately, SMAs’ holdings are more flexible and fluid, which also makes them more attractive to high net worth investors.

Bottom Line

SMAs can be an excellent investment option for those who want more control and transparency over their investment portfolio. They often have higher required minimum investments and may be ideal for those with more cash to invest upfront. Before getting started, do your research to best understand if a SMA is the right investment for your financial situation.

Tips for Investors

If you’re interested in a SMA, consider talking to a financial advisor. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Diversification is a very important part of building your investment portfolio. While it’s key, your asset allocation should also adhere to your risk tolerance.