What is an SMA?

1 min readLast updated January 30, 2024by Unbiased team

Discover the workings of a Separately Managed Account (SMA) and the benefits and drawbacks of this type of investment.

What is an SMA? 

An SMA (separately managed account) offers personalized management of assets designed to meet an investor's specific investment objectives, risk tolerance, and preferences.  

A personal investment advisor tailor-makes these portfolios for their clients, making all SMAs unique.  

Separately managed accounts differ from pooled investment options like mutual funds or exchange-traded funds (ETFs), where investors pool their resources into a professionally managed fund. Here, the investor has direct ownership of the securities. 

How does an SMA work? 

A separately managed account operates through a collaborative relationship between the investor and a professional money manager or investment advisor.  

The process typically unfolds in several stages: 

  • Customization: The investor and the manager collaborate to outline the investment goals, risk appetite, duration, and any preferences or restrictions. 

  • Portfolio construction: Drawing from the investor's outlined objectives, the manager constructs a portfolio strategy comprising individual stocks, bonds, or other securities. 

  • Active management: The manager regularly monitors and adjusts the portfolio, making tactical decisions based on market conditions, economic trends, and the investor's goals. This active management aims to optimize performance and align the portfolio with the investor's evolving needs. 

  • Transparency and reporting: SMAs typically provide investors with transparent reporting, allowing them to track the performance, holdings, and transactions within their accounts regularly.  

  • Rates: The financial advisor typically charges a percentage of the assets in the investor's account. 

What are the pros and cons of SMAs? 

SMAs can be highly beneficial to individuals as they better match their investments with their objectives and liabilities. It gives investors a better chance to reach their goals and minimize liabilities.  

But, for an objective view, let's examine separately managed account's pros and cons. 

Pros:

  • Customization: One of the most significant advantages of separately managed accounts is their high degree of customization. Investors can design their portfolios to align with their specific goals, values, or preferences. Some investors may not want to invest in tobacco or alcohol companies or may prefer investing in organizations that serve some greater good, like protecting the environment.  

  • Increased control: By retaining direct ownership of the securities, investors have more say in which assets are included in their portfolios and the proportions thereof. 

  • Transparency: Investors gain transparency into the holdings within their SMA, allowing for a clearer understanding of where their money is invested. Their monthly statement will show all purchases and sales within their account. 

  • Tax-loss harvesting: Separately managed accounts can offer greater tax efficiency than mutual funds or other investment vehicles. Financial managers can minimize the investor's capital gains tax exposure by selling investments at a loss to offset gains in other areas of their portfolio. 

  • Expertise: SMAs are managed by experienced professionals who use their specialist skills to make investment decisions on behalf of their clients. This is particularly beneficial for investors who lack the time or knowledge to manage their portfolios actively. 

Cons:

While SMAs have many benefits, most things, even the best separately managed accounts, have drawbacks. 

  • Higher buy-in: Many SMAs have substantial minimum investment requirements, ranging from $50,000 to $100,000 and even higher for some accounts, limiting access to this type of investment to high-net-worth investors. 

  • Potentially higher costs: While separately managed accounts provide personalized and professional management, this often comes at a higher cost than passive investment options like index funds or ETFs. Investors should weigh the benefits of customization against the associated fees. 

  • Potentially labor-intensive:  Even though the investment manager manages the securities, the investor must still review and understand what is happening within their portfolio. 

Who can benefit from a SMA? 

Due to their higher buy-in rates and the nature of SMAs, these investments may appeal to a specific type of clientele: 

  • High-net-worth individuals: SMAs are often favored by high-net-worth individuals seeking a personalized approach to investment and are willing to pay for tailored investment strategies. 

  • Investors with specific preferences: Those with specific ethical, social, or environmental preferences may find separately managed accounts appealing, as they allow for the exclusion or inclusion of particular securities. 

  • Tax-conscious investors: Investors looking for greater control over their tax positions may benefit from SMAs. This is particularly relevant to individuals with substantial assets and complex tax situations.  

Seek expert financial advice for your investment goals. 

Separately managed accounts allow investors to custom-make their investment portfolio alongside a professional wealth manager. While they offer unparalleled customization, transparency, and potential tax advantages, they might be suitable for everyone due to their higher costs and the need for active management. 

SMAs can be powerful tools for those with the means to achieve their financial objectives.  

To optimize the growth of these investments, let Unbiased match you with an expert, SEC-regulated financial advisor who can provide expert financial advice and asset management tips.  

Match with an advisor now.

Writers

Unbiased team

Our team of writers, who have decades of experience writing about personal finance, including investing and retirement, are here to help you find out what you must know about life’s biggest financial decisions.