If investments like exchange-traded funds (ETFs) and mutual funds were restaurants, separately managed accounts (SMAs) would be the private chefs.
Instead of investing in funds that everyone can buy, SMAs let you hire professional money managers to cook up custom funds filled with bespoke investment “ingredients” tailored to your tastes. And just as private chefs don’t come cheap, separately managed accounts come with high investment minimums.
However, those who qualify can enjoy more personalization and control than they would have with other fund-type investments.
Separately managed accounts are custom investment portfolios designed and managed by a professional money manager.
From the outside, an SMA may look a lot like a mutual fund in that it can have a variety of investments, including stocks, bonds and alternative assets like real estate investment trusts (REITs). However, SMAs have two important distinctions from other fund-type investments:
So, what does it take to access these private investment chefs who conjure custom portfolios on your behalf? You’ll usually need at least six figures to invest, but you won’t have to be Bill Gates-level wealthy to enjoy this type of managed account.
Separately managed accounts work like custom mutual funds. When you hire a money manager, they’ll select specific investments and then make day-to-day management decisions based on your investment objective.
SMA providers can offer various customization options. Some may provide pre-built portfolios in given categories, like high-yield, balanced or large-cap equity. Others may specialize in custom-made portfolios using multiple asset classes. No matter which type of separately managed account you choose, you’ll still own the individual investments in your separately managed account — which can benefit you and your manager.
For example, you may start with a portfolio with a 5% Apple (AAPL) allocation but later decide you don’t like Apple so much and decrease your AAPL holdings to 2%. Alternatively, the investment manager may become bullish on Apple and increase your holdings on your behalf.
Separately managed accounts have grown in popularity in recent years — nearly 34% year over year from Q1 2020 to Q1 2021 — and for good reason. SMA investors can enjoy several benefits, like:
There’s no investment strategy that’s all roses for everyone, and SMAs are no different. Some of the drawbacks of separately managed accounts include:
If a separately managed account is a private chef, mutual funds are prix fixe menus. With an SMA, you get to customize what’s on your plate. However, you’ll eat what everyone else is eating with a mutual fund. And if you don’t like what’s on the menu, you’d best choose a different restaurant.
Beyond customization, however, the biggest differences between separately managed accounts and mutual funds are the investment minimums and asset ownership.
|Who owns the portfolio assets?
|Separately managed accounts
|$25,000 or more
|As little as $1
But why the high minimums? The main reason is asset ownership.
If you own 10 shares of a mutual fund that owns shares of Apple and Netflix, you don’t own 10 shares of Apple and Netflix. Instead, you own 10 shares of the fund. However, with an SMA, you own individual shares of Apple and Netflix — which are more expensive to acquire than shares of a mutual fund.
The difference between SMAs and mutual funds will be clear on your monthly account statement.
If you want to invest in separately managed accounts, you’ll want to find a financial advisor or registered investment advisor (RIA) with established SMA manager relationships. Your advisory firm or advisor can then suggest potential managers who might align with your goals and investment style.
When interviewing potential managers, look for one who will respect your goals and values when designing and managing your portfolio. You also want to make sure you’re getting enough value from the customized strategies to make an SMA a better fit than a lower-cost mutual fund.
So, if you have the means and the need, a separately managed account can help you find a private investment “chef” who will cook up a portfolio to your heart’s desire. While the price of entry can be steep for many, those looking for expert guidance might be more than happy to pay the check. But don’t stress — your SMA manager won’t expect a tip.
Separately managed accounts are only one of the strategies an advisor can use to build your ideal portfolio. It’s even more important to be clear on the type of financial advisor you want. That’s why we put together a few resources to help: