A Separately Managed Account (SMA) is a private financial portfolio that is managed by registered financial advisor or through a brokerage for the benefit of the individual investor. This investment portfolio can include stocks, bonds, cash or any other form of traded securities.
In comparison, mutual funds involve hundreds of investors often via multiple groups. Mutual funds pool money from several clients, which is then invested by financial advisors for the benefit of the larger group and not the individual.
SMAs are generally advertised as an alternative to mutual funds. In fact, SMAs were initially created in the 1970’s for investors whose needs did not fit the criteria for a mutual fund account.
As SMAs are personalized accounts, the portfolio is designed according to the individual’s risks and goals. Investors receive dividend and franking credits from the underlying shares.
Typically, an SMA requires a minimum investment of $100,000 or $250,000 depending on the investor’s equity or income levels. As a result, SMA accounts have become more popular among wealthier investors.
The sole ownership nature of an SMA gives the investor transparency into underlying stocks. In addition, investors and advisors have a clearer view into the fees being charged to the account, including those for transactions, transfers and corporate actions processing.
Another major benefit of creating an SMA is the investor’s ability to control investments. In turn, this allows the investor to manage the sales of securities, thus increasing tax efficiency. For example, the investor can choose to keep sales at a minimum for a certain period. Or, if an investor cashes out of a security for a loss, this might mean a savings via income taxes.