Separately Managed Accounts: How They Work, Pros and Cons
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What is a separately managed account?
A separately managed account (SMA) is a portfolio that an investor pays a professional advisor to manage separately from their other accounts. The advisor has discretion and authority to buy, sell or trade the investments in the account on the investor’s behalf. However, the investor gives the advisor specific directions for how to manage the portfolio.
A separately managed account may be an option for investors with at least $50,000 who want more control over who manages their investments than they might get with a mutual fund or similar vehicle.
How a separately managed account works
There are several parties involved in a separately managed account.
The investor, who supplies the money.
The asset manager, who buys and sells the investments in the account based on the investor’s guidelines.
The platform manager, who manages the account day to day, such as handling the cash settlements, governance and more.
For example, an investor who puts $100,000 in a separately managed account with a professional asset manager would give the asset manager detailed instructions about what asset classes and companies to avoid, as well as information about financial goals and risk tolerance. The asset manager then creates a portfolio that fits those parameters and then monitors and alters the investments over time to accomplish the investor’s goals. Along the way, the platform manager helps execute the trades and keeps the records.
Separately managed accounts are not the same as exchange funds.
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How much do separately managed accounts cost?
SMA fees typically include a financial advisory fee and an asset management fee, and they vary by advisor. Also, if the advisor's fee is a percentage of assets, larger accounts may pay a lower percentage fee. The fee structure may vary by type of portfolio type, too (i.e., equities versus fixed income or bond ladders).
SMAs may have several different types of fees, so be sure you understand the manager’s fee schedule and what your combined total fees would be. The SMA fee may be on top of the advisor's base fee.
Pros and cons of separately managed accounts
Control.
Visibility.
Personalization.
Time and homework.
High minimums.
Fees.
Advantages of separately managed accounts
Control. The investor controls the separately managed account, not the investment manager. This gives investors the opportunity to “try out” or even replace an investment manager, which can mitigate some of the risks of poor management.
Visibility. SMAs provide real-time transparency to investors, plus investors can monitor the trading activity in detail and get custom reports.
Personalization. The investor sets the risk limits, trading guidelines and other parameters that they feel best serve their needs. This helps create a flexible, customized portfolio. In addition, the investor’s stated goal is the measure of success rather a market benchmark such as the S&P 500 index.
Disadvantages of separately managed accounts
Time and homework. You have to research and find an asset manager that’s right for you, and you’ll need to monitor and provide feedback to the manager on a regular basis. This can take a lot of time and energy.
High minimums. SMAs typically require a minimum investment of at least $50,000. This may be too high for many investors, and it may require investors to place a large portion of their assets with one manager.
Fees. Separately managed accounts can involve management expenses that are complex or opaque. Advisors disclose their fees to the Securities and Exchange Commission on Form ADV Part 2.
Are SMAs better than ETFs or mutual funds?
A separately managed account is not the same as an exchange-traded fund (ETF) or a mutual fund.
Separately Managed Accounts | Mutual Funds |
|---|---|
Investor directly owns assets in the account. Investor sets account restrictions, goals, trading rules and acceptable asset classes. | Money is pooled with money from other investors; investor owns a share of the pool. |
Investor sets account restrictions, goals, trading rules and acceptable asset classes. | Fund manager sets account restrictions, goals, trading rules and acceptable asset classes. |
Investor can view individual holdings and their values any time. | Investor only has access to standard periodic reporting. |
Investor can control tax-loss harvesting and timing of capital gains. | Fund manager controls tax-loss harvesting and timing of capital gains. |
Fee structures can be opaque and hard to compare. | Fee structures must meet regulatory disclosure requirements and are relatively comparable. |
Investor can replace the manager if unhappy with performance. | Investor cannot replace the manager if unhappy with performance. |
Relatively high minimum investment. | Low minimum investment. |
Performance evaluated against the investor’s personal goal. | Performance typically evaluated against a benchmark index. |
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