What to know amid the rise of separately managed accounts

SMAs can provide tax advantages, but investment minimums may be steep

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Before you invest, consider if an SMA is really right for you
(Image credit: Getty Images)

Separately managed accounts (SMAs), or custom investment portfolios overseen by professional money managers, were once reserved for the high-net-worth. But recently, according to The Wall Street Journal, "SMAs are growing in popularity as investment minimums fall — and amid a heavy marketing push."

Per the Journal, this marks a notable shift, with individual investors "bucking the trend toward passive investing in mutual funds and exchange-traded funds in favor of active, individualized money management." While there are certainly upsides to these personalized portfolios, there are also drawbacks worth noting.

What is a separately managed account?

As Investopedia explains it, "an SMA is a portfolio of assets managed by a professional investment firm." Unlike pooled investment vehicles like mutual funds and ETFs, which are comprised of "investments shared by a group of investors," separately managed accounts are personalized to the individual investor, who directly owns all of the securities in the account. 

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"Within the portfolio there may be stocks, bonds, cash or cash equivalents, or other assets," reports SoFi, as it is "up to the investor to choose which strategy to follow, based on their individual needs, risk tolerance, and objectives."

What are the benefits of separately managed accounts?

According to SmartAsset, the fact that you own all of the securities in an SMA "gives you a bit more flexibility as to how those funds are invested and managed, as well as the transparency to monitor trades in real-time." 

Further, you'll have a portfolio that's completely customized to you, as opposed to other pooled investment vehicles, which "are tailored to what best benefits investors as a group," explains SmartAsset. This means that you may have the ability to "exclude certain securities or request that others be added to align with your investment goals," or even "change the direction of the strategy in the case of a recession or other market event," SoFi notes.

Additionally, SMAs can provide tax advantages. According to SoFi, "with separately managed accounts, a financial advisor or wealth manager can implement tax-loss harvesting strategies to help you get the most from your investment dollars."

Are there any downsides to separately managed accounts?

Arguably one of the biggest downsides of SMAs is the cost involved. According to the Journal, citing data from Cerulli Associates, while "average fees for SMAs depend on many factors such as the size of your investment and the asset manager you select," they tend to average a total of "around 1.44% overall, and they include the financial adviser fee of 1.14% and an asset management fee of 0.3%." This is far steeper than the costs of mutual funds and ETFs — "average fees for mutual funds are 1.01% and 0.48% for ETFs," the Journal reports, citing Morningstar Direct.

And while investment minimums for separately managed accounts are getting lower, they can still be steep. Per SmartAsset, "many financial institutions require a hefty minimum to open a SMA, often between $50,000 and $100,000." Sometimes, per the Journal, you may find minimums as low as $25,000.

There's also the possibility that an SMA may offer less diversification than pooled investment vehicles, which is important for lowering your risk by spreading your money across a range of assets. "Since separately managed accounts hold individual securities," writes SoFi, "it's harder for them to offer the same level of broad-based diversification as a mutual fund or exchange-traded fund (ETF), which could hold hundreds or thousands of different stocks."

How can you invest in an SMA?

Before you invest, consider if an SMA is really right for you. "If you are in a high tax bracket and have a lot of sources of capital gains, an SMA may be appropriate," D.J. Tierney, director and senior portfolio strategist at Charles Schwab Asset Management, told the Journal. Meanwhile, for those who are "young and don't have individual capital-gains exposure this may not be for you," per Tierney. 

To open an SMA, you'll need to turn to a professional investment management firm. As SoFi explains, "investors pay a financial professional to manage the separately managed accounts they own," and while "the portfolio manager handles day-to-day decision making [...] the investor retains control over the overall SMA investment strategy."

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