A separately managed account (SMA) is an investment vehicle that allows investors to own a customized portfolio of securities managed by a professional investment firm. SMAs provide investors flexibility in choosing investment securities, managers, custodians while maintaining ownership. They differ from mutual funds where investors own shares of the fund company. SMAs have become increasingly popular for their transparency, flexibility, and tax efficiency. This article analyzes the definition, structure, benefits and risks of using SMAs as an investment option.
SMAs offer customized and flexible investment choices
SMAs allow investors to customize their portfolio based on their specific investment objectives or constraints. For example, investors can select individual stocks and bonds, restrict certain sectors or companies, and apply environmental, social, and governance (ESG) screens. This flexibility contrasts with mutual funds which have predefined objectives and security selection. With an SMA, the manager crafts a unique portfolio matching the investor’s preferences.
SMAs provide greater transparency than pooled investments
Since the investor directly owns the underlying securities, SMAs offer complete transparency into the holdings and trading activity. Investors receive detailed periodic statements listing the account positions. This contrasts with mutual funds which only disclose their top ten holdings periodically. The transparency allows investors to closely monitor an SMA manager’s investment style and performance attribution.
SMAs can have tax efficiency benefits compared to funds
SMA investors directly own the securities with the ability to customize tax-loss harvesting and manage capital gains. Mutual fund managers conduct trading on behalf of all investors in aggregate without regard to individual tax considerations. However, SMA tax efficiency relies heavily on the manager’s trading skill in offsetting gains and losses.
Higher costs and account minimums limit smaller investors
SMAs generally have higher investment management fees compared to mutual funds given the customized services. Typical SMA account minimums exceed $100,000 further restricting access for non-accredited investors. This creates a barrier to entry for middle income families. Some brokerages facilitate fractionalized SMAs to overcome the minimums with fees starting around 1%.
SMAs offer customized and flexible portfolio choices, transparency, and potential tax efficiency relative to pooled fund alternatives. However, the higher fees and investment minimums prohibit adoption for smaller retail investors.