A separately managed account is an investment account run by a professional money manager on your behalf

A separately managed account (SMA) is an investment portfolio that a professional manager controls directly. Unlike a mutual fund or exchange-traded fund where you own a slice of a pooled investment, an SMA is yours alone. The manager buys and sells individual securities—stocks, bonds, or other assets—in an account registered in your name. You own the actual holdings, not shares in a fund. The manager makes all trading decisions within a strategy you agree to upfront.

SMAs are typically offered through brokerage firms, wealth management companies, or investment advisors. You pay a fee based on the total value of your account, usually between 0.5% and 2% per year, depending on the size of the account and the complexity of the strategy. The manager reports directly to you, and you receive statements showing your actual positions.

Key Takeaways

  • You own individual securities in an SMA, not fund shares, which means you see exactly what you hold and can request changes to the portfolio.
  • A professional manager makes all buy and sell decisions within a strategy you choose at the start, such as growth, income, or conservative balanced.
  • Fees are charged as a percentage of assets under management and vary by firm and account size, typically ranging from 0.5% to 2% annually.
  • SMAs require a minimum investment, often $50,000 to $250,000 or higher, which limits access compared to mutual funds or ETFs.
  • Tax efficiency can be better in an SMA because the manager can harvest losses and time sales to your specific tax situation, unlike in pooled funds.

How a separately managed account differs from mutual funds and ETFs

In a mutual fund or ETF, your money is pooled with thousands of other investors. The fund manager buys and sells securities for the entire pool, and you own shares of the fund itself. When the fund sells a security at a gain, all shareholders owe capital gains tax on that gain, even if you did not want to sell. You cannot request specific holdings or exclude certain companies.

In an SMA, the manager buys and sells only for your account. If the manager sells a stock at a loss, that loss can offset your other gains—a strategy called tax-loss harvesting. The manager can also time sales to match your personal tax situation. You see every holding and can request that the manager exclude certain sectors or companies from your portfolio. This level of customization is not available in pooled funds.

The trade-off is cost and minimum investment. A mutual fund or ETF might charge 0.1% to 0.5% annually and accept investments of $1,000 or less. An SMA typically costs more and requires a much larger initial deposit.

Who manages the account and what decisions they make

The manager is usually a registered investment advisor or a professional employed by a brokerage or wealth management firm. Before you open an account, you and the manager agree on an investment strategy—for example, "60% stocks and 40% bonds" or "growth-focused with dividend income." The manager then has discretion to buy and sell within that framework without asking your permission for each trade.

The manager decides when to rebalance your portfolio (bringing it back to your target allocation), which securities to buy and sell, and when to harvest tax losses. You receive regular reports showing all transactions and your current holdings. If your life circumstances change—you retire, receive an inheritance, or need to reduce risk—you can meet with the manager to adjust the strategy.

Some SMAs are model-based, meaning the manager follows a predetermined set of rules or models for buying and selling. Others are discretionary, meaning the manager uses judgment and research to make individual decisions. Both approaches are common; the difference is usually explained in the account agreement.

Minimum investment and fees you will encounter

Most SMAs require an initial deposit of $50,000 to $250,000, though some firms set minimums as low as $25,000 or as high as $500,000 or more. The minimum depends on the firm and the strategy. Smaller accounts may not be worth the manager's time given the cost of servicing them.

Fees are charged as a percentage of assets under management (AUM). A typical structure might be 1.5% on the first $250,000, 1.0% on the next $250,000, and 0.75% on amounts above that. Some firms charge a flat fee instead, such as $5,000 per year regardless of account size. A few charge a combination of a base fee plus a performance fee if the manager beats a benchmark.

When comparing costs, calculate the actual dollar amount. A 1% fee on a $100,000 account is $1,000 per year. A 0.5% fee on the same account is $500. Over time, fee differences compound significantly.

Tax efficiency and loss harvesting in an SMA

One of the main advantages of an SMA is the ability to manage taxes at the individual account level. When the manager sells a security at a loss, that loss belongs to you and can offset capital gains from other sales or up to $3,000 of ordinary income in a given year. Unused losses carry forward to future years.

In a mutual fund, if the fund sells winners and losers, all shareholders pay tax on the net gains. You have no control over the timing or which securities are sold. In an SMA, the manager can time sales strategically and can sell a losing position in your account while holding it in another client's account if the strategy calls for it.

This tax efficiency matters most in taxable accounts (not retirement accounts like IRAs or 401(k)s, where tax-loss harvesting does not apply). Over many years, the tax savings from an SMA can offset some or all of the higher fees compared to a fund.

When an SMA makes sense versus other investment options

An SMA is most useful if you have a substantial amount to invest ($100,000 or more), want customization and transparency in your holdings, and care about tax efficiency. If you want to exclude certain industries or companies from your portfolio for ethical or personal reasons, an SMA lets you do that. If you are in a high tax bracket and hold investments in a taxable account, the tax-loss harvesting benefit may justify the higher fees.

An SMA is less necessary if you have a smaller amount to invest, are comfortable with a standard fund-based approach, or do not need customization. A low-cost index fund or ETF will serve most investors well and costs far less. If you prefer to make your own investment decisions, a self-directed brokerage account gives you full control without paying a manager.

Some investors use both: an SMA for a large core portfolio and a self-directed account for smaller amounts or individual stock picks. Others use an SMA only for a portion of their wealth, such as money they do not want to touch or manage themselves.

How to open an SMA and what to expect

To open an SMA, you contact a brokerage firm, wealth management company, or independent investment advisor that offers them. You will complete an application that asks about your investment goals, time horizon, risk tolerance, and income. The firm will explain the available strategies and fees.

Once you are approved and have funded the account, the manager begins buying securities according to your chosen strategy. This process typically takes a few weeks. You will receive an initial statement showing your holdings and a summary of the strategy. After that, you receive regular statements (usually quarterly or monthly) and can contact the manager anytime to discuss your portfolio.

Before opening an account, ask the manager for a copy of their Form ADV Part 2, which is a disclosure document required by the Securities and Exchange Commission. It explains the manager's background, fees, conflicts of interest, and investment approach. Reading this document is the best way to understand what you are getting into.

Frequently Asked Questions

Can I tell the manager not to buy certain stocks or sectors?

Yes. Most SMAs allow you to request exclusions—for example, no tobacco stocks or no energy companies. The manager will work these restrictions into the strategy. However, too many exclusions can make it harder for the manager to build a diversified portfolio, so some firms limit how many restrictions you can impose.

What happens if the manager performs poorly?

You can fire the manager and move your account to another firm. There is no lock-in period. However, selling securities to move the account may trigger capital gains taxes, so consider the tax cost before switching. Some SMAs include a performance may provide or allow you to switch managers within the same firm without selling.

Is my money in an SMA protected if the firm goes out of business?

Yes, if the firm is a registered broker-dealer. Your securities are held in custody at a separate institution (often a major bank or custodian), not by the manager themselves. If the manager fails, your holdings remain yours. The Securities Investor Protection Corporation (SIPC) also covers accounts up to $500,000 in case of custodian failure, though this is a rare scenario.

Do I have to use an SMA if I have a lot of money to invest?

No. You can use low-cost index funds, ETFs, or a self-directed brokerage account regardless of how much you have. An SMA is an option, not a requirement. The choice depends on whether you value the customization and tax efficiency enough to pay the higher fees.

Can I use an SMA inside a retirement account like an IRA?

Technically yes, but it rarely makes sense. Tax-loss harvesting does not work in retirement accounts because gains and losses are not taxed annually. You would pay the SMA fee without getting the main tax benefit. Most people use SMAs in taxable accounts and keep retirement accounts in lower-cost funds or self-directed investments.