Separately Managed Accounts (SMA): What You Need to Know

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Updated on Wednesday, July 1, 2020

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.

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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

Benefits

  • Flexibility: One of the core benefits of separately managed accounts is the flexibility it offers. An SMA is built specifically for your needs and investment goals. For example, you can decide to exclude certain industries or companies or focus your investments on environmental, social and governance (ESG) investments.
  • Tax efficiency: For individuals with a high net worth, one of the biggest advantages of professionally managed portfolios is the ability to harvest losses in the SMA portfolio to offset capital gains. By investing in an SMA, you can control and minimize the distribution of taxable gains.
  • Low fees: SMAs typically have relatively low fees. The average fee on an SMA is 0.35%. That’s lower than the average fee for a mutual fund, which is 0.68%. There may also be a management fee, however, which is typically 1% of the account’s assets.

Disadvantages

  • High investment minimum: One of the biggest managed portfolio disadvantages is the high investment minimum needed to open an account. Depending on the company you choose, you could need as much as $250,000 or even more to open an SMA. That’s a significant barrier for many investors.
  • Less regulatory oversight: While mutual funds and ETFs have significant oversight and report to regulatory authorities, SMAs have greater independence so that investors can have more control and a more personalized relationship with their portfolio managers.
  • Fewer options: Not as many companies offer SMAs than ETFs, mutual funds and other securities. Even if you have enough money to invest in an SMA, you won’t have as many options to choose from, so it can be more difficult to find a match for your needs.

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.

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