What is a Separately Managed Account (SMA)?

An SMA is a portfolio of assets under the management of a professional investment firm. In the U.S., these firms are called registered investment advisors, or RIAs.

How do they compare to mutual funds?

Like mutual funds, SMAs provide access to professional money management and diversification. At the same time, they provide the following benefits:

Potentially lower overall expenses

Compared to mutual funds, many of the costs of ownership—such as marketing fees and tax costs—may be lower in the SMA structure.

Tax efficiency

Since an SMA is composed of individual securities with an individual cost basis, your institutional manager can use this information to control the amount and timing of gains and losses. He can employ strategies such as tax-loss harvesting to reduce the overall tax drag on your portfolio.

Customization

Because your institutional investment manager is choosing individual securities, you can choose not to invest in certain companies or certain sectors of the market. Virtually any investment requirement can be satisfied. Because you will be working with an investment advisory representative (IAR), the concepts of shelf space, soft dollars and commissions will become less important. Your IAR will help you design the best portfolio possible, tailored to your needs rather than one that is just “okay”.

Control the maturity of your bond portfolio

Especially today, when interest rates are near historic lows, it may be more important to control the overall maturity (or duration) of your fixed-income portfolio, as well as have the ability to adjust quickly as market conditions change. SMAs can help you achieve that.

Transparency

The owner of an SMA can see everything that happens, including trading costs and any other deductions from their principal investment.

A tested and effective investment strategy

SMAs have been around since the 1970s. They were developed to accommodate larger clients who needed to meet specific objectives that did not fit the mutual fund structure. Technological changes have made it possible for investors to access SMAs with as little as $25,000. As of 2012, there is more than $2.7 trillion invested in SMAs in the U.S., and the amount is growing.