Separately Managed Accounts

What Is a Separately Managed Account?

A separately managed account (SMA) is a portfolio of individual securities — stocks, bonds, or both — that a professional investment manager runs on behalf of a single client. Unlike a mutual fund or exchange-traded fund, where many investors share ownership of a pool of assets, an SMA holds every security directly in the client's own brokerage account at a custodian. The manager has discretion to buy and sell within the account, but the client is always the legal owner of each underlying position.

Think of the difference this way: a mutual fund investor owns shares of a fund, which in turn owns securities. An SMA investor simply owns the securities themselves, managed according to a specific strategy by a professional they've hired.

Why Families with Substantial Wealth Use SMAs

Several characteristics make SMAs particularly attractive once a family has enough capital to meet manager minimums. The most significant are tax flexibility, transparency, and the ability to customize the portfolio around the family's broader picture.

Tax Flexibility

Because the client owns each lot of stock or bond individually, a manager can selectively sell positions that are sitting at a loss to generate a tax deduction — a practice called tax-loss harvesting. In a pooled fund, the manager harvests losses (or doesn't) for the entire pool, and the resulting gain or loss flows to every investor on the same schedule. In an SMA, the timing of realized gains and losses can be coordinated specifically with the client's tax situation for that calendar year.

This coordination matters. A family whose other investments have generated large realized gains in a given year may instruct the SMA manager to harvest offsetting losses before year-end. That conversation simply isn't possible inside a fund.

Transparency

An SMA client can see every position in the account at any time. There are no end-of-quarter disclosures, no delayed portfolio holdings reports, no wondering what lies inside a fund's "other" line. For families who want to understand exactly what they own — or who need to report holdings to a compliance officer, a board, or a family governance committee — this level of visibility can be important.

Customization

A manager running an SMA strategy can typically honor certain client-specific instructions: exclude a particular stock (perhaps the family already owns too much of a former employer), tilt the portfolio toward or away from specific industries, or apply an environmental or values-based screen. These adjustments are not unlimited — the manager still runs a recognizable strategy — but the degree of personalization available far exceeds what a pooled fund can offer.

Families with concentrated stock positions in their broader portfolio sometimes use SMAs to deliberately underweight the sectors or companies they're already heavily exposed to elsewhere, effectively using the managed account to reduce overall household concentration.

How SMAs Actually Work

When a family hires an SMA manager, they sign an investment management agreement granting the manager discretion to trade within the account according to the stated strategy. The securities are held at a third-party custodian, entirely separate from the manager's own assets. This separation is an important structural protection: the manager never takes possession of the assets.

The manager models a target portfolio — say, a diversified large-cap equity strategy — and then replicates it across each individual client's account. When the model changes, trades go out to all accounts. Transaction costs are typically low because many managers have negotiated institutional pricing, and commissions at many custodians are now minimal. The manager is paid a separate advisory fee, usually expressed in basis points (hundredths of a percent) of assets under management.

Minimums

Most SMA managers set minimum account sizes, and those minimums can range widely — from a few hundred thousand dollars for simpler equity strategies to several million dollars for taxable fixed-income or more specialized approaches. Families just crossing the threshold where SMAs become available should review how wealth at $25 million is often structured for context on where SMAs tend to fit in the overall picture.

SMAs Compared with Pooled Funds

Neither structure is universally superior. The right choice depends on the family's tax situation, the strategy being accessed, and the amount being invested.

One nuance worth understanding: when a new investor opens an SMA, the manager builds the portfolio from cash, so there are no embedded capital gains inherited from other investors. This is a potential advantage compared with buying into a mutual fund that may have accumulated unrealized gains over many years.

SMAs and Direct Indexing

A closely related concept is direct indexing, which is essentially a specific type of SMA where the manager attempts to replicate the behavior of a market index by owning the individual constituent securities. The appeal is that the client gets index-like diversification while retaining the tax management benefits of direct ownership. Direct indexing has grown as trading costs have declined and technology has made managing hundreds of individual positions more practical. Families evaluating SMAs often find themselves comparing traditional active SMAs, passive direct-indexing SMAs, and conventional index funds as three distinct options along a spectrum.

The Operational Reality: Multiple Managers, One Household

A family running a complete investment program typically doesn't stop at one SMA. They might use one manager for domestic large-cap equities, another for investment-grade fixed income, and a third for international equities — each in a separate account at a shared custodian. This is sometimes called a "manager-of-managers" or "multi-manager" arrangement, and it requires coordination.

Consolidated reporting — aggregating data from all accounts into a single household view — becomes essential at this level. Without it, the family has no clear picture of overall asset allocation, total risk exposure, or realized gains and losses for the year. This is one reason larger families often establish a technology and reporting infrastructure to sit above the individual managers. The process of selecting and monitoring those managers is itself a significant undertaking, covered in depth in the manager selection and due diligence article.

Families should also think carefully about how their investment policy statement governs each individual SMA mandate — specifying benchmark, risk parameters, and any restrictions — so that multiple managers don't inadvertently create overlapping exposures or work at cross purposes on the tax side.

Questions to Ask and Common Mistakes

Before establishing an SMA relationship, families and their advisers often evaluate questions such as: How does the manager handle tax-loss harvesting, and can they coordinate with the family's CPA? What restrictions will and won't the manager accept? How is the account custody structured, and who holds the assets? What is the manager's approach to tracking error — how closely will the account follow the stated strategy after customization?

Common mistakes include treating SMAs as interchangeable with their fund equivalents without accounting for the minimum investment required to achieve adequate diversification, failing to give the manager enough information about the family's broader tax situation to optimize harvesting, and running too many SMAs across different custodians without a consolidated reporting solution. A family that has SMAs at three custodians with three managers and no aggregated view has created complexity without the control that SMAs are intended to provide.

A qualified advisory team — including a CPA who can communicate directly with the SMA manager before year-end — significantly improves the likelihood that the tax management advantages of direct ownership are actually realized in practice.