There are many options in the market when it comes to investing your savings. If you have a background in finance and understand the markets, then you may very well create your own portfolio custom tailored to your financial goals. Most people, however, do not have high knowledge levels about financial products and markets.
This is where investment managers and/or financial advisors come into the equation. People can seek their services, discuss their financial goals, and rely upon the investment managers to advise them about appropriate investment options.
Out of a plethora of investment options available in the market today, there is one called the “Separately Managed Account (SMA)”.
This is an investment option generally accessible only by high net worth (HNW) and ultra-high net worth (UHNW) individuals/families/institutions. SMA accounts usually have a high minimum deposit limit that may be $1 million or more. But before we get into the intricacies, let’s start by understanding what a SMA is.
A separately managed account is an account or group of accounts in which an asset management firm acts as the investment advisor or investment manager to an investor and builds a portfolio for that investor.
The account is custom tailored to needs of that individual investor and solely owned by that investor. It is not commingled with any other investor’s funds. The money manager is responsible for investing all or a portion of the assets in the account according to the investor’s investment goal. The investment manager should use an investment strategy designed to meet the investment goal of the investor.
Chris Cooke, Partner, Wealth Advisor, explains the difference between a separately managed account and a mutual fund.
A separately managed account is an investment vehicle combining the best elements of a mutual fund and a separately managed portfolio. Diversification and professional management are part of both methods, but a separately managed account can also be tailored to the unique needs of the investor.
In a mutual fund there are many investors and there is no customization for the benefit of any single investor. The fund is more of a passive investment vehicle with a pre-determined investment strategy that is managed by a professional portfolio manager. The SMA is potentially more active and may add tax management, ESG characteristics, or specific portfolio additions or prohibitions that relate to its owner’s specific needs.
Most banks, wirehouses, RIA’s, and other investment managers have hefty minimum’s between $50,000 and $100,000 to more directly target high net worth individuals. Using primarily SMA accounts for those individuals often raises those minimum relationship sizes to $500,000 or $1 million.
An investor with three or four SMA accounts (ex US stock, International stock, Bonds) may have to meet account minimums for every single SMA manager. Total required funds are significant when created a well diversified portfolio.
Again, separately managed accounts are different from mutual funds and basic brokerage accounts. The funds in a separately managed account are owned, controlled, and managed on behalf of a single investor. A mutual fund may have many different owners with very different goals and objectives. These individual needs are not considered in the management of the fund.
The investment manager of the account will typically select the assets in the account and will make the investment decisions based on the financial and investment goals of the investor/owner of the SMA. The investment manager will have the authority to make trades in the account.
The separately managed accounts can comprise any asset class including:
The fee structure of smaller SMAs is often higher than that of a mutual fund because of an SMAs personalized investment choices and extra services on behalf of the investor/owner. However, the SMA fee is often a declining % fee as the asset size increases.
In other words, the asset % fee charged goes down as the value of the portfolio rises. There is a point at which many SMAs become cheaper than a corresponding mutual fund! This point is often reached on multi-million dollar portfolios, but infrequently on portfolios less than $1 million.
Separately managed accounts come with numerous benefits:
There are however a few drawbacks with SMAs:
The bottom line is separately managed accounts are usually best for individuals who are looking for greater control, diversification, and customization of their portfolio.
SMAs may not be the best choice for everyone but those who prefer more control over how their funds are invested frequently find SMAs a suitable option.
Again, appropriate due diligence and finding the best run SMA accounts is important. Assess the performance, experience and investment ideology of a number of asset management firms before you engage one.