A separately managed account (SMA), also referred to as a managed account, is an investment account that is like a customized portfolio of individual securities. An individual investor owns those securities — which may include stocks, bonds, and other investments — but a professional money manager oversees the account.
High net-worth investors who want to build customized portfolios often use separately managed accounts (or SMAs), which allow them to keep their assets separate, versus pooling funds alongside other investors through a mutual fund or exchange-traded fund (ETF).
Understanding what an SMA is, as well as the differences between these accounts and mutual funds and other types of pooled investments can help you decide if an SMA is the right approach for you.
How SMAs Work
Investors pay a financial professional to manage the separately managed accounts they own. The portfolio manager handles day-to-day decision making, but the investor retains control over the overall SMA investment strategy. That includes making initial decisions about which securities to hold inside a separately managed account.
A wealth management firm may give SMA investors several portfolio options to choose from. These portfolios can include a mix of different securities that reflect a specific investment strategy or goal. For example, SMA investing may focus on:
• Increasing tax efficiency
• Generating current income
• Managing interest rate risk
• Delivering above-average returns through trend trading
• Promoting ESG (environmental, social and governance) principles
Within the portfolio there may be stocks, bonds, cash or cash equivalents, or other assets. Stock investments may include small-cap stocks, as well as mid-cap, or large-cap companies. It would be up to the investor to choose which strategy to follow, based on their individual needs, risk tolerance, and objectives.
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The fees for separately managed accounts are typically based on a percentage of the assets under management, or AUM. Often, the management firm uses a tiered structure in which the fee decreases as the account balance climbs. So, in some cases, the more you invest in a separately managed account, the less you’ll pay as a percentage of assets for professional management.
Wealth managers may also charge fees based on the type of investment strategy. For instance, you may pay one management fee for an equities-based strategy but a different fee if you focus on fixed income. Generally, separately managed accounts do not carry trading or transaction fees the way there would be in a traditional brokerage account.
How Can SMAs Benefit an Investor?
Separately managed accounts can yield some benefits to investors who can afford them. Generally, SMA investing may be a good fit for higher net worth investors who want to take advantage of professional asset management while still being able to decide what happens with their portfolios.
SMAs sit at the opposite end of the spectrum from robo-advisor accounts. Robo advisors, or automated platforms, typically offer an investing strategy that’s driven by an sophisticated algorithm on the back end. While robo services can vary from company to company, generally the algorithm creates pre-set portfolio options that investors can choose from, based on individual preferences.
Here are some of the key benefits associated with separately managed accounts.
Control, Transparency, and Customization
While an asset manager may make investment decisions on an investor’s behalf, the investor still has the final say on what happens with their portfolio inside a separately managed account.
For instance, if you’re offered a prebuilt portfolio you may be able to exclude certain securities or request that others be added to align with your investment goals. Or you may be able to work with your advisor to hand-pick all the securities that are held inside an SMA, or to change the direction of the strategy in the case of a recession or other market event.
Either way, you always directly own the securities held inside your account.
Tax Benefits
Managing tax liability in an investment portfolio matters. The more tax efficient your portfolio is, the more of your returns you get to keep. With separately managed accounts, a financial advisor or wealth manager can implement tax-loss harvesting strategies to help you get the most from your investment dollars.
Cost
As mentioned, with separately managed accounts, fees are typically asset-based. That means you typically won’t pay commission fees, and since you’re investing in individual securities versus pooled investments (like mutual funds or ETFs), you don’t have to pay fund expense ratios either.
Compared to the fees associated with investing in mutual funds or trading in taxable brokerage accounts, SMAs can be more cost-friendly for investors.
💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.
What Are the Drawbacks of SMAs?
While separately managed accounts may work well for some types of investors, they aren’t necessarily a good fit for everyone. Here are some of the downsides of SMAs to keep in mind.
Investment Minimums
Separately managed accounts typically have higher minimum investment requirements, which may be a barrier to entry for some investors. You may need $50,000 to $100,000 or more to open a separately managed account. The reason being that SMAs provide a highly customized investment portfolio for the investor: hands-on investment management.
By contrast, the investment minimums required to open a traditional self-directed brokerage account can be quite low, depending on the type of account and the institution. Again, this is because a professional manager is not involved.
So if you’re just getting started with investing, you may not qualify for a separately managed account.
Less Diversification
Since separately managed accounts hold individual securities, it’s harder for them to offer the same level of broad-based diversification as a mutual fund or exchange-traded fund (ETF), which could hold hundreds or thousands of different stocks.
SMAs vs Pooled Investment Funds
The main similarity between separately managed accounts and pooled investment funds, e.g. mutual funds and exchange-traded funds, is that SMAs are portfolios of many securities, and the portfolio of a mutual fund or ETF also includes many securities. But SMAs are customized based on the individual investor’s wishes, and managed by a professional investment manager who adheres to the investor’s strategy.
Comparing SMAs and Mutual Funds
With an SMA, your portfolio includes individual securities that you own. A mutual fund, on the other hand, is a pooled investment that includes money from multiple investors.
When you invest in a mutual fund, you don’t get to choose what the fund holds. That’s the job of a fund manager, who decides what to buy or sell, based on the fund’s objectives. So a fund may hold a mix of stocks, bonds, cash or other securities. You, along with the other investors who have pooled their money in the mutual fund, share in the fund’s returns or its losses.
Compared to separately managed accounts, mutual funds can have a much lower initial investment to get started: a hundred dollars versus tens of thousands of dollars (depending on the fund).
And instead of paying an asset-based management fee, mutual funds charge expense ratios. This expense ratio reflects the annual cost of owning the fund.
The Difference Between SMAs and ETFs
The difference between separately managed accounts and exchange-traded funds (ETFs) is similar to the difference between SMAs and mutual funds. Instead of building a portfolio that’s composed of individual securities and managed by a financial professional, you’re pooling money into a fund along with other investors.
This fund can hold hundreds of securities and have specific goals. For example, there are ETFs that invest in gold, in commodities, in biotech, and more.
Many investors begin by putting their money into exchange-traded funds or mutual funds, and then move some of their portfolio into a separately managed account once it grows larger.
The Takeaway
Separately managed funds are a popular way for high net worth investors to have some control over their professionally managed funds when building an investment portfolio. However, if you can’t meet the high minimum investment requirements for a separately managed account, you may want to consider investing in ETFs or mutual funds instead.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
FAQ
How are SMAs customized?
With an SMA, you can work with your financial advisor and/or investment manager to pick all the securities that are held inside an SMA. You can choose to exclude certain securities or ask that others be added to align with your investment goals. You can also request to change the direction of the strategy in the case of a market event like a recession.
What type of due diligence do you need to do before investing in SMAs?
An investor should do thorough due diligence on the money manager they’re considering working with before setting up an SMA. Investigate the manager’s investment philosophy, approach, and process, inquire about their compliance history, and ask to see performance data, including quarterly returns. Inquire about all the fees involved, including transaction expenses. And finally, find out how the investment manager is compensated and what their incentives are.
What is the difference between a separate account and a separately managed account?
A separate account and a separately managed account are the same thing: an investment vehicle that holds securities and is owned by an investor and managed by a professional financial advisor or money manager. These accounts are sometimes referred to by either name.
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