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How a Separately Managed Account (SMA) Works 


When you begin building your investment portfolio, you may start with a mix of exchange-traded funds (ETFs), mutual funds and other investments. But once your nest egg grows, you may be looking for a more personalized approach. A separately managed account (SMA) not only allows your portfolio to be more personalized, but it also gives you more control over your investments. Let’s break down how it works and compare the advantages and disadvantages for your investment needs.

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

How a Separately Managed Account Works

A separately managed account (SMA) is a portfolio of securities you can invest in. It’s similar to an ETF or mutual fund. However, when you invest in a SMA, you own all the securities within your portfolio. 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.

SMAs are managed by professional money managers. Fees may be higher than those associated with mutual funds, but it may be the case of you get what you pay for. For example, you may have more involved management and flexibility when it comes to your investments.

What Are the Benefits of a SMA?

Many investors are drawn to SMAs for a few basic reasons. They offer more control over your investments, increased transparency when it comes to individual trades in the portfolio, and, perhaps more importantly, customization. While other pooled investment vehicles are tailored to what best benefits investors as a group (remember, it’s a group buy-in situation), a SMA’s investment strategy and asset allocation are tailored specifically to its owner.

Another benefit of this investment vehicle is that the value of your investments doesn’t depend on the actions of others. For example, if several investors within a mutual fund decide to pull their money from the fund, it could affect the future performance of the fund. But with a SMA, the performance of the fund isn’t dependent on the investment strategy of others.

Finally, SMAs offer tax benefits. They can help reduce taxes owed on capital gains. In other words, this means how much an investor owes in taxes if the sale price of a security is higher than the purchase price.

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, often between $50,000 and $100,000. That’s a large initial investment, which simply may not be realistic for every investor.

SMAs are also a bit more work since investors are privy to each individual trade. So if you’re an investor who prefers simplicity and a set-it-and-forget-it approach (other than periodic portfolio rebalancing and meetings with your financial advisor, of course), then a SMA may not be for you.

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

SmartAsset: How a Separately Managed Account (SMA) Works

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 financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one 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.

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