What is a separately managed account?
A separately managed account is an account that an investor owns but pays a financial advisor to manage. 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 and parameters for how to manage the portfolio.
A separately managed account (SMA) can be an option for investors with at least $50,000 to invest and who want more control over the management of 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.
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The investor, who supplies the money.
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The asset manager, who buys and sells the investments in the account based on the guidelines the investor sets.
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The platform manager, who handles the day-to-day logistics of managing the fund, such as cash settlements, governance and more.
For example, an investor might put $100,000 in a separately managed account with a professional asset manager. The investor then gives 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 assembles a portfolio of stocks, bonds or other assets that fit those parameters; the asset manager then monitors and alters the investments over time in an effort to accomplish the investor’s goals. The manager engages with the platform manager in order to execute the trades and record-keeping.
How much do separately managed accounts cost?
The average fee for SMAs is around up to 1.34% of assets under management. For a $100,000 account, that would be $1,340 per year. These fees may include a financial advisory fee and an asset management fee.
SMA fees may be higher or lower than the average depending on the advisor. Also, the percentage fee may decrease as the amount of assets under management increases. The fee structure may vary by type of portfolio type, too (i.e., equities versus fixed income or bond ladders).
🤓Nerdy Tip
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.
Pros and cons of separately managed accounts
Advantages of separately managed accounts
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Control. One of the biggest advantages of a separately managed account is that the investor controls the account, not the investment manager. This gives investors the opportunity to “try out” or even replace an investment manager, which can help the investor mitigate some of the risks of poor management.
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Visibility. SMAs provide real-time transparency to investors, plus they can monitor the trading activity in detail. Investors can also get custom reports.
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Personalization. The investor gets to set the risk limits, trading guidelines and other parameters that they feel best serve their specific needs. This helps create a flexible, customized portfolio. In addition, success is measured against the investor’s stated goal rather than against a market benchmark index such as the S&P 500.
Disadvantages of separately managed accounts
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Time and homework. It’s up to you 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 involvement.
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High minimums. SMAs typically require a minimum investment of at least $50,000. This may be unaffordable for many investors, and it may require investors to place a large amount of their investable assets with one manager.
SMAs vs. mutual funds
A separately managed account is not the same as a mutual fund.
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Separately Managed Accounts |
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Investor directly owns assets in the account. |
Money is pooled with money from other investors; investor owns a share of the pool. |
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Investor sets account restrictions, goals, trading rules and acceptable asset classes. |
Fund manager sets account restrictions, goals, trading rules and acceptable asset classes. |
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Investor can view individual holdings and their values any time. |
Investor only has access to standard periodic reporting. |
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Investor can control tax-loss harvesting and timing of capital gains. |
Fund manager controls tax-loss harvesting and timing of capital gains. |
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Fee structures can be opaque and hard to compare. |
Fee structures must meet regulatory disclosure requirements and are relatively comparable. |
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Investor can replace the manager if unhappy with performance. |
Investor cannot replace the manager if unhappy with performance. |
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Relatively high minimum investment. |
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Performance evaluated against the investor’s personal goal. |
Performance typically evaluated against a benchmark index. |
