As your assets grow, you may want more customization and control over your investments. If that’s the case, separately managed accounts (SMAs) may be a good solution for you. SMAs – portfolios of securities managed by an asset management firm and overseen by a professional money manager – are best for high net worth individuals. They’re uniquely designed for people with larger amounts of assets to address their personal preferences and financial goals.

If you’re thinking about opening an account, here’s what you need to know about the SMA investment structure.

• What is a separately managed account (SMA)?
• How separately managed accounts work
• Benefits and disadvantages of separately managed accounts
• Do I need a separately managed account?
• How SMAs compare to other investment vehicles
• What to consider when choosing an investment account manager

What is a separately managed account (SMA)?

An SMA is an investment vehicle composed of stocks, bonds and other individual securities that’s overseen by a professional money manager. Unlike some other investment options – like mutual funds – where your money is combined with that of other investors, you directly own the securities within an SMA. Because you own the securities, you have more control over your investments, and there are more options for customization.

Most investment managers work in teams to perform research to provide you with the best recommendations and investment advice, and you’ll get personalized attention to help you meet your financial goals. However, the ability to customize your investments and the added personal attention does come at a premium. SMAs tend to be for individuals with larger amounts of assets to invest, and typically require you to meet high minimum investment levels.

How separately managed accounts work

Ownership structure

Rather than owning shares in a fund that owns the individual portfolio securities – like you would with a mutual fund or exchange-traded fund (ETF) – SMAs work quite differently. With an SMA, the investor owns the individual securities within their portfolio.

Investment styles

Because you own the individual securities in your SMA investment, you have more control over your investments than you would with mutual funds or ETFs. You can set restrictions and establish preferences on how you want your money invested. For example, you can decide not to invest in certain companies or industries, or invest only in specific sectors. You and your portfolio manager will work together to create your SMA fund and to design your SMA model portfolio.

SMAs can include a wide variety of asset classes and strategies, including large-cap, mid-cap, small-cap, value and growth equities. You can also choose between fixed-income, balanced and domestic or international accounts.

Fees

While SMAs tend to have high investment minimums, separately managed account fees are typically low in comparison to other common investment vehicles. On average, the fee is 0.35% for SMAs, versus 0.68% for mutual funds and 0.20% for ETFs.

However, a financial professional’s fee is usually added to the management fee of the underlying investment. This investment fee averages 1% of the account’s assets, bringing your total costs closer to an average of 1.35%. Your rate can also vary depending on the underlying investments in your SMA.

Account minimums

While investment minimums can vary from company to company, you’ll generally need to have a substantial amount of money to invest in SMAs. Which firm is best for you depends on your desired portfolio manager, minimum net worth and available cash flow. Below are the account minimums for four major financial services firms that offer SMAs, as examples:

• Charles Schwab: $100,000-$250,000
• Fidelity: $100,000-$350,000
• Morgan Stanley: $25,000+
• TD Ameritrade: $250,000

Tax implications

Investing in an SMA can be helpful for investors who are worried about tax efficiency. When you invest in an SMA, you are only taxed on the gains in your specific portfolio. An SMA is made up of individual securities, so you can minimize capital gains by instructing your money manager to sell investments that will produce a capital loss through tax loss harvesting.

Benefits and disadvantages of separately managed accounts

Do I need a separately managed account?

SMAs are best if you are a high-earner or have significant assets and a substantial amount of money – for example, $100,000 or more – available to invest. Investing in an SMA makes sense if you want to take advantage of SMA investment tax efficiencies, and want the customization and personalization that managed accounts offer.

If you are new to investing or don’t have a significant amount of money that you are willing to tie up for years in the stock market, you’d be better off with another investment vehicle. Brokerage accounts or mutual funds, which have lower investment minimums, may be a wiser choice for you than an SMA fund.

How SMAs compare to other investment vehicles

Separately managed accounts vs. mutual funds

Mutual funds are a popular choice for investors. If you’re trying to decide between mutual funds versus separately managed accounts, it’s important to consider the differences between them.

With a mutual fund, your money is pooled together with money from other investors to buy securities like stocks and bonds. Instead of owning the individual securities, you own shares of the mutual fund.

Mutual funds are professionally managed and provide instant diversification. When you invest in a mutual fund, you invest in hundreds of stocks or bonds at once, which can help mitigate losses.

Mutual funds tend to be a good choice for beginner investors, as they usually have low investment minimums; you can often get started with as little as $1,000. But they have higher fees than SMAs, on average, cannot be customized and don’t offer the same tax advantages.

UMA vs. SMA

For individuals with a high net worth, an alternative to an SMA is a unified management account (UMA). When thinking about opening a UMA versus SMA, here’s what you need to know.

A UMA is a single account that combines multiple types of investments, such as mutual funds, ETFs, stocks and bonds, as opposed to just individual securities like an SMA. The account is overseen by a professional investment manager and can target several investing strategies, eliminating the need for multiple accounts.

Like SMAs, UMAs tend to have high investment minimums. However, they also usually have higher fees. The fee is typically 1.5% to 3% of the assets under management, though these rates generally already include additional investing costs, such as fund fees.

Separately managed accounts vs. brokerage accounts

If you want to invest on your own, you can open a brokerage account with an investment company or brokerage firm.

What’s the difference between a managed account versus brokerage account? SMAs are professionally managed, with a financial portfolio manager hand-selecting investments to meet your goals. With a brokerage account, you can choose your own investments, picking stocks, bonds, mutual funds, ETFs or index funds. If you are a novice investor or want a more hands-off approach, you can opt for a robo-advisor who will pick an asset allocation for you based on your investment goals and preferences.

Unlike SMAs, which have high account minimums, many brokerage accounts have $0 minimums, so you can start investing with very little money. Brokerage firms may have added fees and trade costs, so it’s a good idea to compare companies before opening an account.

What to consider when choosing an investment account manager

If you decide to open an SMA, choosing the right investment company and account manager plays a significant role in your investment’s returns. Before opening an account, make sure you complete the following steps to pick the right manager:

• Check their credentials: Ensure that your portfolio manager is a registered investment advisor. Regulated by the U.S Securities and Exchange Commission (SEC), registered investment advisors are held to standards that require them to buy and sell investments solely based on their clients’ needs rather than their own interests. You can find out if an investment advisor is registered by using the FINRA BrokerCheck tool. You may also want to look for specific designations, such as the certified financial planner (CFP) or chartered financial analyst (CFA), which require a certain level of experience and study to obtain.
• Ask about specialization: Before choosing an investment account manager, ask about their areas of specialization. For example, some portfolio managers specialize in international investments rather than domestic, or are particularly interested in volatile industries. You’ll want to find someone who can meet your specific needs.
• Review Form ADV: Investment firms and financial advisors who are registered with the SEC are required to file Form ADV. This document outlines the services the firm offers, their fees and billing practices and any past disciplinary actions that have occurred due to professional misconduct. You can get a free copy at adviserinfo.sec.gov.

In the financial services industry, it can be a little confusing figuring out the difference between a financial advisor vs. financial planner. There’s a fair amount of overlap between the two roles, and some people use the terms interchangeably — but there is a difference.

A financial advisor is more likely to focus on your investments, while a financial planner is a type of financial advisor who takes a broader view of your financial situation. Fees can be another important difference between financial advisors and financial planners. This article compares the two to better help you find the right professional to manage your money.

• The difference between a financial advisor and a financial planner
• Fees for a financial planner vs. a financial advisor
• When should you get a financial planner vs. financial advisor?
• How to choose a financial planner or financial advisor

The difference between a financial advisor and a financial planner

Let’s look at the different types of advisors and planners in a bit more detail, along with what services they each offer.

What is a financial advisor?

When someone chooses between working as a financial advisor vs. financial planner, their title shows potential clients what work they specialize in. Someone who describes themselves as a financial advisor tends to focus more on investments.

What a financial advisor does: A financial advisor’s typical duties include designing your portfolio, managing your investments and calculating how much you’d need to invest per year to reach your financial goals. As part of this service, an investment advisor could answer some basic questions for other parts of your financial plan, like taxes and insurance, but it’s not their primary service. Instead, they are more focused on working with clients looking for investment and portfolio management, while leaving additional parts of the financial plan to other professionals.

Financial advisor credentials: To process investments for their clients, a financial advisor will need to have at least their FINRA licenses. There are different types of advisors depending on what license they have. An advisor with a Series 6 license could only sell mutual funds for a commission, while one with a Series 7 license could also sell individual securities like stocks and bonds. If they charge for giving investment advice, they need a Series 65 license.

Advisors could also train for additional investment credentials, such as a chartered financial analyst (CFA) or chartered financial consultant (ChFC) designation. To earn these designations, a financial advisor must go through additional training and pass an exam, above and beyond the minimum license requirements.

What is a financial planner?

A financial planner is a type of financial advisor — in fact, all financial planners are advisors, but not all advisors are necessarily financial planners. So how are the services provided different for a financial planner vs. financial advisor? A financial planner typically looks at your entire situation, not just your investments.

What a financial planner does: On top of investment management, a planner could also help with budgeting, debt management, insurance, retirement planning, taxes and estate planning. After reviewing your entire situation, this professional would create a financial plan with steps for you to follow. For example, they could design your monthly budget, tell you what insurance to buy and set up a portfolio recommendation as part of your plan. You could then hire the planner to keep you on-track with the goals or go off and follow the plan by yourself.

Financial planner credentials: You may have also heard of a CFP, which stands for certified financial planner. But what does a certified financial planner do differently? They operate mostly the same as a regular financial planner and give the same sort of advice — the difference is they have more training. Before someone can earn this certification, they must have at least a bachelor’s degree and three years of full-time financial planning experience. They must also complete an intensive course on different types of financial planning (if they do not already hold another designation, such as Certified Public Accountant (CPA), CFA or ChFC) and pass an exam to qualify.

In terms of the CFP vs. financial advisor comparison, another difference is that a CFP must adhere to the fiduciary standard, meaning they must put a client’s interests ahead of their own when recommending investments. Financial advisors and non-CFP financial planners do not need to meet this standard, and can recommend products that are suitable, but not necessarily the very best for a client: For example, they can recommend a slightly worse product that pays them a higher commission.

Fees for a financial planner vs. a financial advisor

Fees are another key difference between financial planning and investment management. A financial planner is more likely to charge for their time than a financial advisor. They could charge you by the hour for financial planning advice, or charge you a flat fee to put together a plan.

On the other hand, a financial advisor is more likely to charge an asset-based fee, which is based on a percentage of the amount of assets you have under their management. This fee is then deducted from your portfolio each year. If an advisor charges a 1% fee and you invested $100,000, they will deduct $1,000 a year from your portfolio. Additionally, an advisor might make commissions when you purchase investments.

However, these rules are not set in stone, as you could see planners charging asset-based fees for ongoing services and advisors charging for their time. Some firms also charge a single fee for a program that includes both investment management and financial planning.

Before working with a financial advisor or financial planner, it’s important to ask questions and make sure you clearly understand their fee model as well as what services are included under that fee.

When should you get a financial planner vs. financial advisor?

Whether you should work with a financial planner or a financial advisor depends on your goals. The major function of financial planning is to create a list of your major long-term goals, while figuring out the steps you can follow to meet them. In other words, financial planning provides a more holistic view of your entire situation.

So how can a financial advisor help differently? A financial advisor is likely going to be more focused on your investments and will only touch on other parts of your financial plan. If you’re primarily looking for investment advice, an advisor could be a better choice. Since this is their specialty, they could do a better job in this one area, versus a generalist financial planner.

When it comes to titles, though, keep in mind that these aren’t always two distinct professionals. Financial planners are a type of financial advisor, whereas some financial advisors can also offer financial planning. You will also see some advisory firms offer programs that combine investment/portfolio management and financial planning. Still, if you’re looking for a specific service, the job titles can give you an idea what someone specializes in.

How to choose a financial planner or financial advisor

Whether you want to work with a financial planner or a financial advisor, there are a few tips you can follow to find the right match.

Know where to start your search. The organizations in charge of issuing credentials like the CFP or CFA have member databases where you can search for professionals near you. You could also search for local planners and advisors through Google, or by using a review website like MagnifyMoney or asking friends for recommendations.

Do your research. If an advisor looks promising, you can do a quick check on their background. With FINRA’s BrokerCheck system, you can see whether an organization has run into any trouble with past clients by pulling up their Form ADV; this paperwork will also provide more details on the services offered and the firm’s fee schedule. For individual advisors and planners, you can use the SEC’s Action Lookup tool to find more information.

Don’t hesitate to ask questions. When you schedule a meeting with an advisor, ask plenty of questions. How long have they been in business? What are their specialties? What type of clients do they typically work with? Check out this list for more questions you could ask.

Make sure you understand the costs involved. Advisor and planner fee schedules can be complicated. Ask them for a clear breakdown, so you understand exactly how they would be compensated. You should also ask them about any potential conflicts of interest, like whether they earn commissions from recommending certain products over others.

Request client referrals. If you’re impressed with your first meeting, see whether they can give you testimonials from other clients. If an advisor or planner is doing a good job, they should have other clients willing to say so.

Compare your options. Finding a good financial advisor or financial planner is a bit like dating. Ideally, you connect with someone for a long-term financial relationship. Don’t rush the process and sign on with the first person you meet. Take the time for a few meetings so you can make an informed comparison and find the best fit for the management of your money and your investments.