Separately Managed Account (SMA): Professionally Managed Investment Portfolio

August 25, 2024 4 min read Finance Investments SMA Separate Accounts Managed Accounts Broker-Dealers Subadvisors

A Separately Managed Account (SMA) is a professionally managed portfolio of securities that uses pooled money to buy investments owned directly by the account holder.

A Separately Managed Account (SMA) is a professionally managed portfolio of individual securities. Unlike mutual funds, where investors own shares of the fund, SMA investors own the individual securities directly, allowing for a higher degree of customization and control over the investment strategy.

Professional Management and Custody

The management of SMAs is typically undertaken by professional money managers who offer tailored investment advice and strategies to meet the specific financial goals of the account holder. These managers may be selected from a list curated by broker-dealers.

Broker-Dealers and Subadvisors

Broker-dealers play a crucial role in the SMA ecosystem. They market SMAs and help select suitable money managers or subadvisors to manage the funds based on the investors’ requirements. This selection process ensures that experienced professionals handle the investments, optimizing returns and managing risks effectively.

Types of Separately Managed Accounts

Equity SMAs

Focused on stock investments, these accounts involve the direct holding of shares in companies, often tailored to specific sectors or investment strategies.

Fixed-Income SMAs

These accounts primarily invest in bonds and other fixed-income securities, providing a stable income stream and preservation of capital.

Balanced SMAs

Combining both equity and fixed-income investments, balanced SMAs seek to provide growth and income while managing risk through diversification.

Custom SMAs

Tailored to meet specific investor needs, these SMAs can include various asset classes according to personalized investment strategies and goals.

Key Benefits of SMAs

Customization

Due to direct ownership of securities, investors can implement customized investment strategies, including socially responsible investing (SRI) or tax optimization strategies.

Transparency

Investors receive detailed information about each holding within their SMA, providing a clear view of their investment portfolio.

Tax Efficiency

Direct ownership allows for personalized tax management strategies, such as harvesting tax losses to offset gains.

Flexibility

SMAs offer the ability to adopt custom investment strategies, adjust portfolios based on individual needs, and respond swiftly to market changes.

Historical Context

The concept of personalized investment management through separately managed accounts has evolved over decades. Initially available solely to high-net-worth individuals, SMAs have become progressively accessible due to advancements in financial technology and an increasing number of broker-dealers offering personalized investment services.

Applicability

SMAs are suitable for both individual and institutional investors looking for dedicated portfolio management, greater control, and a tailored investment approach compared to pooled investment vehicles like mutual funds or exchange-traded funds (ETFs).

Comparisons

SMAs vs. Mutual Funds

Ownership: SMA investors own the individual securities directly, whereas mutual fund investors own shares in the fund.
Customization: SMAs allow for a high level of customization, unlike mutual funds, which follow a predefined strategy.
Tax Efficiency: SMAs offer personalized tax strategies, whereas mutual fund gains are distributed among all shareholders, often without specific tax optimization.

SMAs vs. ETFs

Flexibility: SMAs provide greater flexibility and tailored strategy compared to ETFs, which track an index or predefined strategy.
Transparency: SMAs offer full visibility into individual holdings, whereas ETFs provide periodic disclosures.

Managed Account: General term for investment accounts managed by professionals, can include SMAs.
Subadvisor: Professional money manager selected by broker-dealers to manage SMA investments.
Broker-Dealer: A firm or individual acting as an intermediary in securities transactions and offering investment management services.

FAQs

Who can invest in an SMA?

Typically, SMAs are suitable for high-net-worth individuals or institutional investors due to the required minimum investment amounts, though changing market dynamics are increasingly making them accessible to a broader audience.

How do I select a money manager for my SMA?

Your broker-dealer will generally provide a curated list of subadvisors. The selection is based on your financial goals, investment strategy preferences, and risk tolerance.

What are the minimum investment amounts for SMAs?

Minimum investment amounts vary greatly among providers and can range from $100,000 to several million dollars.

References

“Separately Managed Accounts,” Investopedia, https://www.investopedia.com/terms/s/separately-managed-accounts.asp.
“Understanding Different Types of Investment Accounts,” Financial Industry Regulatory Authority (FINRA), https://www.finra.org/investors/learn-to-invest/types-investment-accounts.

Summary

A Separately Managed Account (SMA) is an advanced investment vehicle offering direct ownership of individual securities with professional management. It provides high customization, transparency, and tax efficiency, making it suitable for investors seeking tailored investment strategies and control over their portfolios. Understanding the roles of broker-dealers and subadvisors can help navigate the investment landscape and optimize financial outcomes through SMAs.