Financial Opinion and Insights

Separately Managed Accounts – Are They Right For You?

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®


Ever heard of `separately managed accounts’?   

They’re not new.  In fact, I’ve been using SMAs with many of my own clients for more than sixteen years!  But, like most things in life, what makes sense and advisable for one person may be totally inappropriate and inadvisable for another.   

SMAs get their name from their structure.   To understand SMAs it’s helpful to understand the investment most investors are very familiar with:  Mutual funds.    

Mutual funds are investment companies that `pool’ investors’ money and invest in securities.   The investors don’t own the securities; they are shareholders in the investment company.  You could say that regardless of how many securities the investment company buys, the shareholder owns only one security – the shares of the investment company.    

 Also, since their money is `pooled’ a 75-year-old investor’s money is in the same `pot’ with a 25-year-old’s.    Where this might become meaningful is during a market decline.   It’s during market declines that many managers might want to purchase devalued shares at `bargain prices’ but may not be able to do so because of shareholder selling.  Often, it’s the younger, less experienced, investor who may see himself as a trader who will sell during this period.  That puts the manager in a position of having to sell positions – instead of purchasing – in order to raise cash to meet these redemption requests!  That can serve to penalize other shareholders in the pool.  It’s what’s called a `market-impact cost’.   There’s more to learn about mutual funds; but, for the purposes of this piece, it’s enough for you to understand that it’s `pooled’ money and there are issues to be understood.  To learn more, feel free to request our free report, Understanding Mutual Funds.  You can use the Request Info tab on our website.   

SMAs are just what they sound like:  Separately managed accounts.  In an SMA, the investor’s money isn’t pooled.  It’s managed separately.  There’s still a portfolio manager, just like a mutual fund, but this time the investor has direct ownership of the securities in the portfolio, not shares of the investment company.  An SMA owner’s statement will show the securities owned, number of shares, pricing, and generally a lot more.   Some, like our clients, even have access to 24/7 sophisticated performance reporting on not only each manager, but on the combined performance of all managers taken as a portfolio, with all gain-loss, and tax information.     

And, since SMAs are not comprised of `pooled’ money, they have a lot of other advantages, too.  But, as I said, they may or may not be right for you!   

Here’s a worksheet is designed to help us gather necessary information to determine if separately managed accounts (SMAs) may be a suitable investment for helping you reach your current and future investment goals.   

1.  What is the total value of your current portfolio, including both taxable and tax-deferred assets?   

Investors with significant assets can access the services of a professional money manager to create and manage a portfolio of securities.  Unlike a mutual fund, this portfolio (known as an SMA) gives the investor direct ownership of the securities. Direct ownership gives the money manager the ability to help minimize capital gains taxes through strategic buying and selling based on your personal financial needs.   

2.   Do you have more than $250,000 in taxable assets that are available to invest?  Do NOT include tax-deferred investments, such as 401(k) plans, IRAs, etc.   [Note:  SMAs can make sense for some IRAs because of other attractive features like portfolio customization and possibly lower expenses; but for the purposes of this worksheet, we’ll talk about taxable investments only.]   

High-net-worth investors can use SMAs to help control the timing of security sales and help minimize short term capital gains taxes. Assets sold within 12 months of purchase are taxed as ordinary income. Assets held longer are taxed at the long-term capital gains rate.  See our report, Understanding Mutual Funds, for more information on this.   

3.   Are you concerned about the impact capital gains have on your investments?   

SMAs allow investors to help manage the realization of gains or losses to fit their tax needs in any given year.   Mutual funds typically do not provide this flexibility.   

4.   What tax bracket are you in?   

SMAs may offer tax features that are often attractive to investors in higher tax brackets.   

5.  What is the total value of the assets that you have invested in equity accounts (include individual stocks, mutual funds, ETFs, etc.), and how many different accounts do you have?  How much do you have invested in bonds?   

Multiple accounts often appear to offer adequate diversification when, in reality, there may be substantial overlap in the holdings of different investments.  For example, I’ve often seen two different “blue chip” growth mutual funds holding many of some of the same securities.  Unlike mutual funds, SMAs may allow investors a level of customization over their holdings to minimize duplication.   

6.   What is the total value of the assets you have invested in mutual funds, and how much are you paying in fees on those investments?   

Many investors are unaware of the total fees they are paying on their investments. It is often possible to access the services of a separate account manager for a comparable fee.  Again our report, Understanding Mutual Funds, goes into more detail about this.   

7.   Have you ever paid capital gains on a mutual fund that lost money?   

Again, because mutual funds are a “pooled” investment vehicle, investors in a given fund can incur capital gains taxes when other investors redeem their shares and the fund manager is forced to sell securities to raise cash. With SMAs, the investment decisions of one investor have no impact on the tax liability of other investors.   

8.  Do you have any stock holdings that have significantly appreciated in value?   

SMAs can provide customized investment strategies designed to gradually transform a single-stock position into a more diversified portfolio in a tax-efficient manner.   

You’re probably saying, “Jim, it sounds like you really like SMAs!”  Well, I do! – But, again, not for everybody.   In case you’re new to IFG, this blog, or any of my work, you should know investment choices have NO affect on our income.  IFG does not sell products or earn commissions; so I don’t have a dog in the fight.   

 A smaller investor is likely better off with a portfolio comprised of no-load mutual funds and exchange-traded funds (ETFs); and there are even managers who will choose and manage a portfolio of those for the smaller investor; but, when assets begin moving north of $250,000 customized strategies, versus off-the-shelf fund purchasing – can become worthwhile.  At $350,000, there are strategies that make perfect sense; and, when assets get north of $500,000 it, in my opinion, becomes no contest.  At $500,000, one has to wonder why anyone would even consider pooling money!   

I’ve long held a personal belief that most retail fund managers are constantly `playing games’ in order to make their portfolios look good for purely marketing purposes.  Too many of them are compensated not so much on performance, but the ability to attract assets.   That’s what gets them interviewed in the media and makes `stars’ out of them so they – like baseball free-agents – can get bigger contracts either at home or with another fund complex.  

Institutional mangers that manage major endowments, pension funds, and SMAs are compensated on performance and their income is tied directly to investor success or failure, not marketing or asset attraction – that’s why you seldom see them on tv.    In fact, most of these managers can not be accessed by the public directly because of their high minimums.   Advisors are able to access them on behalf of clients by aggregating – not pooling – assets to achieve the manager minimums. 

Yes, I like them better whenever they make sense for a client.  I’ll get off my soapbox now.  

If you’d like to learn more, feel free to contact me.   


The Independent Financial Group is a fee-only registered investment advisor and does not sell products earn commissions, or accept any third-party compensation or incentives of any description.  IFG also does not provide tax or legal advice.  The reader should seek competent counsel to address those issues. Opinions expressed in this piece are those of the author.