Overview
A Separately Managed Account (SMA) is an investment portfolio assembled by a brokerage firm or financial advisor on behalf of a single investor. Unlike mutual funds or other collective investment schemes where an individual’s funds are pooled with those of other investors, the owner of an SMA directly owns the underlying securities.
Key Features
- Direct Ownership: Investors directly own the underlying securities in the SMA.
- Customization: Investors can customize their portfolio based on individual preferences and financial goals.
- Tax Efficiency: Due to direct ownership, investors can more effectively manage their tax situations.
- Professional Management: SMAs are managed by professional money managers (subadvisors), providing expertise and management services.
Examples
- High-Net-Worth Individual Account: An investor with high net worth seeks to diversify their portfolio and uses an SMA for personalized asset allocation and tax efficiency.
- Institutional Account: A small foundation or trust that requires customized investment strategies might use an SMA to meet specific liquidity needs and restrictions based on donor requirements.
- Ethical Investing: An investor opts for an SMA to exclude certain stocks or sectors from their portfolio, such as tobacco or firearms, to align with personal ethical beliefs.
Frequently Asked Questions
What is the minimum investment for an SMA?
The minimum investment requirement for SMAs varies, but it typically ranges from $100,000 to $1 million, depending on the financial institution and the specific SMA offering.
How do SMAs differ from mutual funds?
Unlike mutual funds where investors collectively own shares of the pool, SMA investors own individual securities directly. SMAs offer more customization and potentially greater tax efficiency.
Are there any specific risks associated with SMAs?
SMA investors might face risks associated with the individual securities within the portfolio, market volatility, and liquidity issues. Professional managers aim to mitigate these risks through strategic asset allocation.
Can I have input on investment decisions in an SMA?
Yes, investors can provide input on investment decisions and restrictions, such as opting out of specific sectors or stocks, maintaining alignment with personal investment priorities.
How are SMAs taxed?
Investors in SMAs receive tax benefits due to direct security ownership, which allows for tailored tax loss harvesting strategies and personalized tax management.
Related Terms
Mutual Fund
A mutual fund is an investment vehicle that pools money from multiple investors to purchase a diversified portfolio of securities, managed by professionals.
Exchange-Traded Fund (ETF)
An ETF is an investment fund traded on stock exchanges, similar to stocks. It holds assets such as stocks, commodities, or bonds and generally operates with an arbitrage mechanism designed to keep it trading close to its net asset value.
Subadvisor
A subadvisor is a professional money manager selected by a brokerage or financial advisor to manage client funds within a separately managed account (SMA).
Online References
- Investopedia Article: What is a Separately Managed Account (SMA)?
- SEC: Separately Managed Accounts
- Morningstar: Separately Managed Accounts
Suggested Books for Further Studies
- “Investment Analysis and Portfolio Management” by Frank K. Reilly and Keith C. Brown
- “The Intelligent Investor” by Benjamin Graham
- “Asset Management: A Systematic Approach to Factor Investing” by Andrew Ang
Fundamentals of Separately Managed Accounts (SMAs): Investment Management Basics Quiz
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