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What Are Separately Managed Accounts (SMAs)?

By Rebecca Lake · September 27, 2021 · 5 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

What Are Separately Managed Accounts (SMAs)?

Separately managed accounts, also referred to as managed accounts or controlled accounts, are investment vehicles that hold individual securities. Investors own those securities — which may include stocks, bonds and cash — but a professional money manager oversees them.

High and ultra-high net worth investors who want to build customized portfolios often use these types of accounts, which allow investors to keep their assets separate, versus pooling funds alongside other investors through a mutual fund or exchange-traded fund (ETF).

They’re an increasingly popular method of investments, with the separately managed accounts increasing by more than a third in the first quarter of 2021. Understanding the differences between separately managed accounts and mutual funds or other types of pooled investments can help you decide if it’s the right approach for you.

What Is SMA in Finance?

A separately managed account is an investment account owned by an individual investor but managed by someone else. The manager may be a financial advisor or a wealth management firm. The advisor or wealth manager can typically make investment decisions on the investor’s behalf, including when to buy or sell securities.

SMA investing is typically the domain of individuals with a higher net worth or more disposable income to invest. The minimum investment for a separately managed account may be in the five- to six-figure range, depending on the wealth manager’s requirements. Investors may choose to open separately managed accounts in addition to taxable brokerage accounts or Individual Retirement Accounts (IRAs).

Recommended: What is a Brokerage Account and How Does it Work?

How Do SMAs Work?

Investors pay a financial professional a fee to manage the separately managed accounts that they own. The financial advisor handles day-to-day decision making, but the investor retains control over the overall 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

• Producing above-average returns through trend trading

• Promoting ESG (environmental, social and governance) principles

Within the portfolio there may be stocks, bonds, and cash or cash equivalents. Stock investments may include small-cap, 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. Once they make their selection, the financial advisor or wealth manager would assume responsibility for overseeing the SMA in exchange for a fee.

Recommended: What is Market Cap?

Financial professionals typically calculate the fees on separately managed accounts fees based on a percentage of the assets under management. Often, they use a tiered structure in which the percentage decreases as your account balance climbs. So 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 separately managed accounts fees based on the type of investment strategy. So, for instance, you may pay one management fee for an equities-based strategy but a different fee if you prefer to 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 several benefits to investors. Generally, SMA investing may be a good fit for higher net worth investors who want to take advantage of professional asset management while still having a say in what happens with their portfolios. SMAs sit at the opposite end of the spectrum from robo-advisors, which offer automated investing directed by an algorithm.

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 Efficiency

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 (i.e. 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.

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. Considering the possible disadvantages is also important for deciding if this investment strategy may be right for you.

Here are some of the downsides of SMAs to keep in mind.

Investment Minimums

Separately managed accounts may have higher minimum investment requirements, which may be a barrier to entry for some investors. For instance, instead of being able to invest with as little as $100 in a brokerage account you may need $100,000 or more to open a separately managed account. 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 stocks, it’s harder for them to offer the same level of broad-based diversification as a mutual fund or exchange-traded fund which could hold hundreds or thousands of different stocks.

SMAs vs. Mutual Funds vs. ETFs

Separately managed accounts, mutual funds and exchange-traded funds all offer different pathways to investing. Whether you prefer one over the other can depend on your goals, risk tolerance and the amount you can invest. While you might assume they’re the same it’s important to understand how all three compare.

Separately Managed Accounts vs. Mutual Funds

When discussing separately managed accounts vs. mutual funds, you’re really talking about the difference between an individual investment and a pooled investment. 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. You may need $500 or $1,000 to get started, versus tens of thousands of dollars. But you have much less control compared to SMAs 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 SMAs and exchange-traded funds is very similar to the difference between separately managed accounts 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 different securities and have specific goals. For example, there are ETFs that invest in gold.

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.

Recommended: ETF vs. Mutual Funds: Learning the Difference

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, there’s another way to build wealth with professional guidance.

By opening a SoFi Invest brokerage account, you can invest automatically, with no SoFi management fees. Using the platform, you can choose either automated or active investing and build a portfolio of stocks, exchange-traded funds, and cryptocurrency.

Photo credit: iStock/adamkaz


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