How a Separately Managed Account (SMA) Works

A separately managed account (SMA) is a custom investment portfolio that a professional asset manager manages on behalf of an 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. They often 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?

A separately managed account (SMA) is a professionally managed investment portfolio designed to meet the specific financial goals, risk tolerance and preferences of a single investor. SMAs offer a bespoke approach in which the investor has complete control over the securities included in the account.

This gives you a bit more flexibility as to the investment and management of those funds. Its transparency allows you to monitor trades in real time. This flexibility enables more precise tax strategies, such as harvesting losses to offset gains or optimizing transaction timing to reduce tax liabilities.

Professional wealth managers manage SMAs, actively adjust the account’s holdings based on market conditions and the investor’s evolving financial objectives.

Fees may be higher than those associated with mutual funds, but it may be a case of you get what you pay for.

Citing data from Cerulli Associates, the Wall Street Journal reported in 2024 that the fees for SMAs typically average around 1.44% of assets under management.¹ Meanwhile, the average expense ratio of equity mutual funds in 2024 was 1.10%, according to the Investment Company Institute.²

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 includes:

High-quality corporate bonds
Dividend-paying blue-chip stocks
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 an SMA?

Many investors utilize SMAs for their unique advantages.

Tax benefits. SMAs strategies can help minimize taxes, such as by strategically selling securities at a loss to offset capital 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. This offers greater control over investment decisions than pooled vehicles such as mutual funds or ETFs.
Transparency. Investors can see each trade and holding within their SMA, giving them a clear view of portfolio management and overall allocation.
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 other investors’ actions. This is different from mutual funds, where large redemptions by others can impact overall performance.

Potential Drawbacks of SMAs

An investor reviews how a Separately Managed Account (SMA) works.

Separately managed accounts aren’t for everyone. Many financial institutions require a hefty minimum to open an SMA and may charge higher fees, such as:

High minimum investment requirements. SMAs typically have high account minimums that can range from $50,000 to over $5 million, depending on the SMA.³ It makes them less accessible to smaller investors.
Higher fees. While fees vary, SMAs often have higher management costs than 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: You can customize SMAs. However, 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 that include a collection of securities, such as stocks, bonds and other assets. However, when one invests in a mutual fund, their funds pool with those of other investors. A money manager then collectively invests in a single fund and professionally manages it.

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 investment and management. This is also why it might be ideal for those with significant funds to invest. In short, multiple investors own mutual funds, while one individual owns SMAs.

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.

SMAs vs. Direct Indexing

One of the fastest-growing developments in the SMA space is direct indexing.

This is worth understanding separately because it changes who can realistically access these accounts. Rather than pursuing an actively managed strategy like the bond-and-dividend-stock example described earlier, direct indexing takes a passive index and replicates it by purchasing the individual stocks that make it up within an account you own outright.

This still delivers the core SMA advantages, including direct ownership, real-time transparency and tax-loss harvesting. However, it applies them to indexing rather than active management.

Because you hold each underlying stock separately rather than a single mutual fund or ETF share, a manager can sell off individual losing positions to harvest tax losses while the portfolio as a whole continues to track the index closely. An index fund or ETF simply can’t offer that same stock-by-stock harvesting, since investors only own shares of the fund itself, not the underlying stocks directly.

Minimums vary considerably by provider:

The direct indexing product from Fidelity starts at a $5,000 minimum.⁴
Wealthfront offers standalone S&P 500 and Nasdaq-100 direct indexing portfolios at that same $5,000 threshold, though its broader U.S. direct indexing option requires $100,000.⁵
The Personalized Indexing service from Charles Schwab also starts at $100,000.

Compared to the $50,000 to $5 million range typical of traditional actively managed SMAs, this makes direct indexing meaningfully more accessible, and, in some cases, by a wide margin.

Fees tend to run lower too, since the underlying strategy is passive rather than actively managed. Depending on the provider, annual fees for direct indexing typically fall somewhere between a low-cost index fund’s expense ratio and around 0.40%, well below the fee levels associated with an actively managed SMA like the one described earlier in this piece.

For investors mainly interested in tax-efficient, low-cost market exposure rather than a fully customized active strategy, direct indexing is often a more accessible entry point into the SMA structure than a traditional actively managed account would be.

Bottom Line

An umbrella over a seesaw balancing money and risk.

SMAs can be an excellent investment option for those who want greater control and transparency over their portfolios. They often have higher minimum investment requirements and may be ideal for those with more cash to invest upfront. Be sure to do your research to best understand if an SMA is the right investment for your financial situation.

Tips for Investors

If you’re interested in an 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 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.