Separately Managed Account

A separately managed account (SMA) is a portfolio of securities purchased and held in the name of one investor, managed by a professional money manager. Unlike a mutual fund or ETF, where ownership is pooled and indirect, an SMA investor owns the underlying stocks or bonds directly, with a manager executing decisions on their behalf.

The case for direct ownership

SMAs solve a problem created by pooled funds. In a mutual fund, the manager buys and sells securities to serve the collective portfolio, and all shareholders bear the tax consequences. If the manager sells a winner at a $100,000 gain, every shareholder (even those who never asked for it) is liable for a pro-rata share of that gain. This is the cost of pooling.

In an SMA, the manager buys and sells for you alone. If you tell the manager to avoid realising a particular gain, they can. If you want to hold a stock the manager thinks is mediocre but you believe in, the manager can. The account is yours; the manager advises and executes, but the investment decisions can reflect your preferences. This flexibility is enormously valuable for investors with large, concentrated positions, strong tax concerns, or specific ESG views.

Direct ownership also clarifies accountability. You can audit exactly what you own and when. You receive the proxy ballots directly. You get the dividend cheques (or they settle to your cash account). There is no fund structure to muddy the water; there is you, your manager, and your securities.

Minimums and scale

SMAs are not democratic. A typical SMA has a minimum of $100,000 to $250,000; institutional-grade accounts run into the millions. This excludes most retail investors, which is why SMAs are primarily a tool of the affluent. A wealth-management firm serving high-net-worth clients will usually offer both SMAs and pooled funds; the SMA is the premium, bespoke option.

Because SMAs do not pool capital, they are more expensive to operate. A mutual fund manager can leverage economies of scale: trading costs, research, and compliance spread across thousands of accounts. A separately managed account requires dedicated reporting, customisation, and (often) personalised rebalancing. This is why SMAs typically charge 0.5% to 2% annually (sometimes higher), whereas a comparable index fund might charge 0.03%.

Tax efficiency and customisation

The tax advantage of SMAs is real. Suppose you own a stock worth $500,000 with a $50,000 cost basis. The stock has become volatile, and your manager recommends selling. In a mutual fund, the fund sells, and you owe capital-gains tax on the $450,000 gain. In an SMA, you can tell the manager not to sell—or to sell only a portion. You retain control of your tax timing.

This becomes especially powerful at year-end. An SMA manager can harvest losses in your account (selling losers to offset gains elsewhere) without triggering the same loss for pooled fund shareholders. Over time, this tax-loss harvesting can add up to meaningful value. A retiree in a high tax bracket might save tens of thousands over a decade through disciplined tax management in an SMA.

Customisation extends beyond taxes. Some SMAs allow you to exclude certain sectors or stocks. A healthcare executive might ask the manager to avoid holdings that compete with her employer. An investor with religious concerns might exclude alcohol and tobacco. These customisations are nearly impossible in a pooled fund (though some thematic ETFs cater to specific values). An SMA can be tailored to your constraints.

The alternative: segregated versus pooled

The broader world of professional management splits between segregated (direct-ownership) and pooled. An SMA is segregated. A mutual fund or ETF is pooled. A separately managed account sits at the high end of the wealth spectrum; a hedge fund or private equity fund is typically the domain of institutions and accredited investors; a registered investment company is open to all.

SMAs occupy a middle tier: regulated professionally, but without the scale constraints or tax drag of pooled funds. They are common among wealth-management firms like those at large banks or independent advisers serving $250 million-plus in assets. They are less common among retail discount brokers.

Fee structures and alignment

Most SMAs charge a percentage of assets under management (AUM). A $1 million account at 1% annually costs $10,000 per year. This is roughly aligned with the idea that managing a larger account should be more remunerative than managing a smaller one. Some SMAs also charge a performance fee on top of the base AUM fee—say, 20% of gains above a benchmark. This introduces a “two-and-twenty” model borrowed from hedge funds, aligning the manager’s incentive with yours.

Fee-only advisers (those who take no product commissions and are strictly compensated by clients) often prefer SMAs because the fee is transparent and directly tied to performance rather than to sales. This removes a perverse incentive: the adviser has no reason to churn the portfolio or sell expensive products. The incentive is purely to grow your account.

The custodian and operational risk

Like registered investment companies, SMAs require a third party to hold assets. A custodian (usually a bank or large broker) holds the securities, processes trades, and sends you statements. This separation protects you if the manager becomes insolvent or goes rogue. Your securities remain in the custodian’s vault, shielded from the manager’s creditors.

Operational risk remains. A manager who is dishonest or incompetent can still harm you. Due diligence on the manager—their track record, their team, their conflicts of interest—is essential. Unlike a mutual fund, which has board oversight and SEC regulation, an SMA is ultimately a bilateral relationship between you and the manager. You are relying on the manager’s fiduciary duty and the custodian’s controls.

When to choose an SMA

SMAs make sense if: (1) you have substantial capital ($250,000+), (2) you have a large, concentrated position with tax concerns, (3) you have specific values or constraints you want honoured, (4) you want direct visibility into holdings, or (5) you believe a personalised relationship with a manager will outweigh the higher fees. They make less sense if you are comfortable with a low-cost index fund or if your portfolio is modest.

See also