There’s been an upswing in the popularity of separately managed accounts (SMAs) of late. But they're not as popular as mutual funds or ETFs, and many investors don’t know the ins and outs—how separately managed accounts work, the advantages and disadvantages, and how they compare to other kinds of investments.
For the right investor, an SMA can be a useful addition to your portfolio. Here's what you should know:
What is a Separately Managed Account?
A separately managed account, or SMA, is a portfolio of securities managed (for you) by a professional asset management firm. It’s like having your own private mutual fund—instead of managing a portfolio of securities for a group of investors, the portfolio is being managed for you alone.
There are two kinds of SMA: single-style and multiple-style. Single-style SMAs invest in one asset class, such as an equity or fixed income portfolio. Multiple-style, as you would guess, invests across asset classes and/or managers.
What Are the Benefits of Separately Managed Accounts?
For the right investor, SMAs can check several boxes on your investment goal list. Here are some reasons to give SMAs a look:
- You can customize. An SMA is an individual portfolio of investments that you own, so it can be built in a variety of ways to satisfy your investment wishes. If you want to avoid alcohol or tobacco companies or invest more in biotech firms, you can. This also allows you to exclude company stock from your portfolio if you already have a significant holding elsewhere.
- There’s greater transparency. Because you’re the owner of the securities within the portfolio, you’ll be privy to the trades and transactions in real-time, along with information about how your investments are performing.
- You have more control. You own direct shares of the securities in the portfolio, so you have a say as a shareholder.
- There may be tax benefits. With a mutual fund, capital gains are passed on to shareholders in the fund. But your professional money manager can manage the equities in an SMA by selling losses to offset the gains, reducing your overall tax bill.
- You aren’t at the mercy of others. As an investor in a mutual fund, you may be affected when other investors decide to sell their shares. But as an individual investor in an SMA, the investment strategy is all about you.
What Are the Drawbacks of Separately Managed Accounts?
SMAs aren’t right for every investor. Here are some of the disadvantages:
- The buy-in is substantial. The minimum you’ll need to invest in a separately managed account isn’t small. You’ll likely need $50,000 to $100,000 to meet many firms’ minimums, and even as much as $300,000 for some accounts. If you aren’t a higher net worth investor, this could be a big ask.
- They may require more work. If you’re not a hands-on investor, an SMA may mean more research than you’re looking for, since you’ll be party to every transaction that happens within the account. You’ll also have to do your own homework on the investments and the financial professional you hire, since there is no prospectus.
How Does a Separately Managed Account Compare to a Mutual Fund?
A mutual fund is owned by multiple investors who have each purchased a share in a pool of securities—and the fund itself owns the securities. A separately managed account, conversely, is owned by an individual investor who owns all of the investments inside the portfolio. And because an SMA has one owner, that investor can customize the mix of securities inside the SMA, while mutual fund holders have no say over the investments within a set mutual fund.
A mutual fund is also a smaller buy-in, with minimums closer to $1,000, whereas you'll need $50,000 and up to open an SMA. That said, mutual fund fees tend to be more expensive than the asset-based fees assessed by a separately managed account.
For higher net worth investors seeking to invest their money, a separately managed account can will allow you greater transparency and control of your investments, while under the guidance of a financial professional.