Separately Managed Accounts (SMAs): Individual Investment Accounts Managed by Professional Asset Managers

August 31, 2024 4 min read Finance Investments SMAs Asset Management Investment Accounts High Net Worth Individuals Portfolio Management

Separately Managed Accounts (SMAs) offer individualized investment portfolios tailored to high-net-worth clients, managed by professional asset managers. Learn about their details, advantages, and comparisons to mutual funds and ETFs.

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Separately Managed Accounts (SMAs) are customized investment portfolios managed on behalf of individual investors by professional asset managers. Unlike mutual funds or exchange-traded funds (ETFs), SMAs provide direct ownership of the securities within the portfolio. This allows for greater flexibility and customization based on the client’s specific financial goals, risk tolerance, and investment preferences.

Key Features of SMAs

Customization and Personalization

One of the primary benefits of SMAs is the ability to tailor the investment strategy to the individual client’s needs. This might include specific asset allocations, exclusion of certain sectors or stocks due to ethical concerns, and tax-loss harvesting to manage tax liabilities.

Direct Ownership

In contrast to mutual funds, where investors own shares of the fund, SMA investors directly own the underlying securities in their account. This can potentially provide more control over capital gains and taxation events.

Professional Management

SMAs are managed by professional asset managers or firms with expertise in investment strategies, market analysis, and portfolio management. This ensures that the investments are actively monitored and adjusted according to market conditions and the client’s objectives.

Comparison with Mutual Funds and ETFs

SMAs vs. Mutual Funds

Ownership: In SMAs, investors own individual securities, whereas in mutual funds, investors own a share of the fund.
Customization: SMAs offer personalized portfolios; mutual funds have a standard portfolio common to all investors.
Tax Considerations: SMAs can be more tax-efficient due to direct ownership and the possibility of tax-loss harvesting.

SMAs vs. ETFs

Management: SMAs are actively managed, while ETFs typically follow an index or a passive strategy.
Flexibility: SMAs are customizable to the investor’s preferences, while ETFs offer less flexibility and personalization.
Cost: SMAs generally incur higher management fees compared to ETFs due to the personalized service and active management involved.

Historical Context and Evolution

Origins

The concept of separately managed accounts dates back to the 1970s, evolving from the need for more personalized investment solutions for high-net-worth individuals.

Growth

In recent decades, the demand for SMAs has grown significantly, driven by their flexibility, transparency, and personalized nature. The proliferation of financial technology has also facilitated easier management and customization of these accounts.

Applicability of SMAs

High-Net-Worth Individuals

SMAs are particularly suitable for high-net-worth individuals who seek personalized investment management. The higher minimum investment requirement aligns with the financial capacity and personalized service expectations of affluent investors.

Institutional Investors

Some institutional investors such as endowments, foundations, and pension funds may opt for SMAs for specific mandates that require a customized approach and detailed control over asset allocation.

Unified Managed Accounts (UMAs)

UMAs combine multiple investment products, including SMAs, mutual funds, and ETFs, into a single account, offering a more diversified and comprehensive investment solution.

Private Wealth Management

Private wealth management involves a variety of financial services tailored for high-net-worth clients, including investment management, financial planning, estate planning, and tax services.

FAQs

What are the typical minimum investment requirements for SMAs?

Minimum investment requirements for SMAs typically range from $100,000 to $500,000, depending on the asset manager and the specific strategy offered.

Are SMAs suitable for retirement accounts?

Yes, SMAs can be tailored for retirement accounts, providing individualized investment strategies aligned with long-term retirement goals.

How do fees for SMAs compare to mutual funds?

Fees for SMAs are generally higher than those for mutual funds, reflecting the personalized management and investment strategies. However, the tax efficiencies and customized service can justify the cost for many investors.

References

CFA Institute. (2022). Exploring Separately Managed Accounts. Retrieved from CFA Institute
Morningstar. (2023). The Benefits and Drawbacks of SMAs. Retrieved from Morningstar

Summary

Separately Managed Accounts (SMAs) offer bespoke investment solutions, providing direct ownership of individual securities while being managed by professional asset managers. With benefits such as customization, tax efficiency, and personalized management, SMAs cater primarily to high-net-worth individuals and institutional investors seeking a tailored and flexible approach to investing. Understanding the distinctions between SMAs and other investment vehicles like mutual funds and ETFs can help investors make informed decisions based on their financial goals and preferences.