When Do Separately Managed Accounts Make Sense?

Mutual funds are reliable, cost-effective investment vehicles that have the potential to grow over time and with little effort on the part of the investor. Their low investment barriers and low management fees make them a staple of retirement funds and brokerage accounts.

As convenient as mutual funds are, they aren’t a perfect fit for many high-net-worth investors. Enter, separately managed accounts, or, SMAs. SMAs are portfolios of assets (stocks, bonds, cash and other securities) managed by investment firms and customized for individual investors. Relative to mutual funds, these accounts tend to have high minimums, ranging from $100,000 to $5 million, but they also give account owners higher-touch service and, in many cases, a direct line to the professional money managers.

Whereas mutual fund assets are pooled among a broad base of shareholders, SMA assets are owned directly by account holders. This translates to more control, flexibility and transparency that may make them a better option. Here are three scenarios where high-net-worth investors might consider an SMA.

When You'd Like to Minimize Exposure to a Single Stock

Most investors understand the risk of tying too much of their net worth to one stock or one industry. Yet, for executives who have significant ownership in employee stock, diversification can be easier said than done given the rules and market ramifications related to selling company stock.

The same is true for families who own private companies with significant exposure to one industry. While there are strategies advisors can use to minimize such risk, SMAs typically allow for more customization than cobbling together off-the-shelf mutual funds or exchange-traded funds.

When You Want Your Investments to Align With Your Values

Although values-based investing is but a small portion of all investments in the United States, investing with an eye to Environmental, Social and Governance factors, or ESG, is gaining traction. Measured by assets under management in ESG funds, or mutual funds dedicated to a better world through environmental, social or governance, sustainable-facing funds set a new record of cash inflows at the end of 2019, according to research firm Morningstar.

The challenge is that investors have vastly different ideas about how to prioritize these values; a company may rank when it comes to environmental impact, for example, but may fall short on a key social issue. Here’s where separately-managed accounts come in. They make it possible for investors to tailor their portfolios for their precise preferences for a wide range of factors.

When You'd Like to Manage Your Taxes More Efficiently

One potentially big advantage for SMAs over mutual funds is the option to defer gains and harvest losses. With mutual funds, investors must pay their capital gains every year. Not so with SMAs, where the investor owns actual shares of the underlying assets. This makes it far easier to make the call on when to sell and take a loss or realize a gain. In the right hands, tax-related investment management can end up being far more valuable than a lucky call on an individual stock or sector.

For most investors, mutual funds are a terrific option for getting diversified exposure and professional money management. Yet, for investors with significant wealth and more complicated investment needs, SMAs are an option worth exploring.