As your wealth grows, so does the complexity of managing it — like upgrading from a yard that usually just needed a quick mow to one that needs seasonal landscaping, targeted irrigation, and routine weed-pulling.
The same principle applies to investing. What starts as a simple 401(k) and a few index funds may eventually expand into concentrated stock positions, complex tax considerations, and competing priorities across multiple accounts. That’s where separately managed accounts (SMAs) can help.
In this article, we’ll unpack what SMAs are, how they differ from other investment vehicles, and why they’re quickly becoming the preferred structure for investing.
An SMA is a professionally managed investment portfolio made up of individual securities (e.g., stocks, bonds, or alternatives) that you own directly. Unlike mutual funds or exchange-traded funds (ETFs), where investors pool their money together and own shares of the fund, an SMA is personalized and tailored to your risk tolerance, investment goals, and tax needs.
To use an analogy, if mutual funds and ETFs are pre-packaged meal kits, SMAs are made-to-order cuisine. The “ingredients” are selected to suit your preferences, and you can swap or remove anything that doesn’t align with your goals or dietary needs — whether that’s avoiding a specific company or incorporating screens that drive the portfolio to align with your values.
One popular application of SMAs is direct indexing, which is a strategy that replicates a market index (like the S&P 500) by purchasing its individual components. This allows investors, with the help of an investment advisor, to track index performance while still designing the portfolio around their situation.
Even so, the separate account structure isn’t limited to equity strategies or index funds; it can include other types of investments (such as fixed income or alternative asset classes) and investment styles.
SMAs, mutual funds, and ETFs can each provide diversified exposure to the broader market as well as specific industries, geographies, themes, and so on. That said, the structures of these vehicles are fundamentally different, which impacts your portfolio strategy in a number of ways.
| Feature | SMA | Mutual Fund | ETF |
| Ownership | You own the individual securities | You own shares of a pooled fund | You own shares of a pooled fund |
| Customization | High, you can exclude specific holdings or strategies | Limited, portfolio is managed according to the fund's investment strategy | Limited, portfolio is managed according to the fund's investment strategy |
| Transparency | High, you can view exact holdings in real time | Moderate, holdings reported periodically but also depends on fund strategy | High, daily disclosure of holdings—except for some active funds |
| Tax Efficiency | High, tax-loss harvesting and gain deferral can be implemented | Varies, fund activity may generate capital gains for all shareholders | Moderate, the in-kind redemption structure can help avoid capital gain distributions |
| Cost | Higher, typically an asset-based fee for portfolio management and oversight | Varies, includes management fees and fund-level expenses | Typically low expense ratios |
| Accessibility | Becoming more accessible, account minimums often range from $250k-$500k | Generally accessible; initial investment minimums vary by fund | Accessible, share prices vary and many platforms offer fractional share investing |
SMAs inherently create more control because you own each distinct asset in your portfolio. This opens the door to active tax management and customized investment strategies — like avoiding overlap with concentrated stock positions or excluding industries you don’t want to support.
The short answer: SMAs are similar to ETFs and mutual funds, except they’re designed for one investor (not for thousands). And as you’d expect, personalization has a price.
The slightly longer answer: SMAs tend to be modestly more expensive than a pooled fund tracking the same index because they unlock customization capabilities and another layer of tax efficiency. For investors in higher tax brackets or with more complex portfolios, that added value often outweighs the incremental cost.
Historically, SMAs were reserved for institutional investors due to their high minimums and higher costs. But thanks to advancements in technology and portfolio management platforms, the barriers to entry have come down. Minimums are more accessible, and fees are becoming more competitive with mutual funds and ETFs, especially once you factor in the additional tax benefits.
As the adage goes, there are only two certainties in life: death and taxes. While the former is a one-time occurrence, taxes are an annual inevitability — which means reducing tax drag and minimizing liabilities is integral to building and preserving wealth.
SMAs offer a level of tax efficiency that’s difficult to achieve with mutual funds or ETFs.
Strategically harvesting losses can offset capital gains elsewhere in your portfolio or reduce up to $3,000 of ordinary income annually. Any unused losses can be carried forward into future tax years, or used outside of your portfolio if other gains, like the sale of a business, occur.
These same rules and allowances apply to mutual funds and ETFs as well. However, opportunities for harvesting losses with these vehicles are limited to down markets — the fund itself has to trade at a loss.
With an SMA, you can selectively sell positions that have declined in value to realize a capital loss, regardless of the market environment. To give you an idea of the scale of opportunities, from 1998 to 2022, markets experienced a broad range of financial and economic climates: the dot-com bubble, the Great Financial Crisis, as well as the longest bull market in history. Even so, the Russell 3000 Index had stocks with negative returns every single year.
If you owned a fund that tracked this index, you’d be limited to down years. If you owned an SMA that mirrored this index, you’d have abundant opportunities to harvest losses.
It’s also viable to build a portfolio around an outsized position. Perhaps you’ve owned Apple or NVIDIA for years — it’s an enviable spot to be in, but those positions likely dominate your portfolio now and expose you to unnecessary risk. And because they’ve appreciated significantly, selling them outright could trigger a substantial capital gains tax bill, and the size of the position may no longer strategically fit into your asset allocation.
The SMA structure allows you to work around this predicament without triggering a huge tax bill. You can contribute highly appreciated stocks (along with cash) to the SMA. From there, the manager would build around them, constructing an index-like portfolio that complements your existing holdings. Over time, they can gradually reduce your concentrated exposure with tax-efficient strategies.
With an SMA, you have more control over the timing and magnitude of realized gains. Your advisor can choose which specific tax lots to sell based on your financial situation. For instance, they can prioritize selling long-term gains (which are taxed more favorably than short-term gains), avoid selling high-gain positions altogether, and align sales with offsetting losses.
With more control comes more flexibility. To help illustrate this, let’s consider two investors: Matt and Sam.
Matt invests in a mutual fund that tracks the S&P 500. His investments are pooled with thousands of others, and he owns shares in the fund — not the individual companies.
On the other hand, Sam uses an SMA that mirrors the same index, but he owns the underlying stocks directly, which enables his financial advisor to tailor the portfolio to his needs.
Sam works at Salesforce, one of the companies in the S&P 500. Since he regularly receives RSUs as part of his compensation, he’s already heavily exposed to Salesforce stock. Sam’s SMA manager customizes his portfolio to exclude Salesforce, helping him avoid concentration risk.
Matt, meanwhile, can’t make this kind of adjustment. His mutual fund is obligated to track the index. Salesforce stays in the mix, regardless of his personal exposure.
Key takeaway: Owning individual securities gives an SMA manager a path to add or exclude certain securities.
Sam’s advisor sees that shares of Coca-Cola have declined in value. To capture the loss, the advisor sells Coca-Cola and immediately replaces it with PepsiCo, a comparable company in the same sector. Sam maintains similar market exposure, stays aligned with the index, and harvests a loss in the process — all without altering his overall investment strategy.
Matt’s fund manager might also sell losing positions periodically, but he can’t influence which positions to sell or apply the losses specifically to his tax situation. If Matt wants to harvest losses in his portfolio, the entire fund would need to decline in value below your cost basis.
Moreover, mutual fund managers often need to raise cash to meet shareholder redemptions or simply rebalance the fund’s holdings, which means Matt could still incur taxes on capital gains distributions even when the fund is in a down market or underperforming that year.
Key takeaway: Owning individual securities can also offer increased tax efficiency by harvesting losses, avoiding capital gain distributions, and managing specific tax lots.
Sam logs into his brokerage platform and sees exactly which stocks he owns, how each is performing, and what changes his advisor has made.
Matt can also track his fund’s performance online — but not the day-to-day moves of the underlying securities.
Key takeaway: This transparency provides more clarity and, in turn, allows for informed decision-making.
Sam wants his portfolio to match his values, including environmental sustainability and labor practices. Working with his advisor, he chooses to exclude companies with poor ESG (Environmental, Social, and Governance) ratings from his SMA. Instead, his advisor tilts toward companies with strong commitments to clean energy and corporate transparency.
Matt doesn’t have this level of control. If he wants to align his investments with his values, he has to find a specialty ESG fund.
Key takeaway: SMAs allow for precise, values-based investment decisions.
While SMAs offer significant advantages, they’re not always the right fit for every investor. Like any investment structure, SMAs have their own set of trade-offs that should be carefully weighed before moving forward.
SMAs were traditionally reserved for institutional investors and high-net-worth households. They are more accessible these days, but SMA strategies can still have high minimums relative to other options. That’s because they require more hands-on management and infrastructure than pooled vehicles like mutual funds. For individual investors still building their portfolios, this barrier may delay access to the benefits of personalized asset management.
Your brokerage or custodian statements may be longer than what you’re used to, potentially spanning hundreds of pages, depending on the number of holdings. However, most electronic statements make it easy to view a clear summary of your portfolio, recent activity, and key performance metrics. And if you’re working with a financial advisor and CPA, they’ll typically handle the brass tacks behind the scenes, including any year-end tax reporting.
Fees for SMAs can vary depending on the provider, strategy, and level of customization, but the gross management fee could range from 0.12% to 0.18%, which is fairly competitive with other active management funds on a percentage basis. The actual dollar amount may feel more noticeable, especially if your account is intricate or includes overlay services like tax management.
That said, many investors find that the benefits of tax efficiency (i.e., better after-tax returns) and personalized exposure offset the cost — but it’s important to run the numbers and understand the full fee picture.
SMAs tend to be most valuable when your financial life increases in complexity. Let’s walk through a few scenarios.
You have concentrated stock or recent/future liquidity events. SMAs can be particularly useful for high earners or investors sitting on a concentrated position — whether it’s from RSUs, an IPO, or a long-term investment that’s appreciated significantly. They can also play a proactive role if you expect a liquidity event down the road. In these situations, direct indexing and tax-loss harvesting strategies can help diversify your portfolio while managing (or even preemptively offsetting) the tax impact of recognizing significant capital gains in the future, whether that’s trimming large positions or selling a business.
You’re in a high tax bracket. The tax benefits of SMAs scale with your marginal tax rate. If you’re subject to the highest federal brackets (or live in a high-tax state), managing capital gains can unlock material savings.
You’re sitting on a messy portfolio. Think of your portfolio like a closet. Over the years, you’ve collected various positions — some individual stocks, maybe a few ETFs — and at one point, each investment felt like a good idea. But like your wardrobe over time (or mine, at least), it may feel a bit cluttered.
You might still own shares of a company you don’t believe in anymore. You might be holding something just to avoid the tax hit of selling. With the help of a financial professional, an SMA can help organize your “closet.” You can contribute individual stocks and ETFs you already own, along with cash, and let a manager declutter strategically.
On the other hand, SMAs aren’t a universal wealth management solution. If you’re in a low federal income tax bracket, or if most of your investable assets are held in retirement accounts (IRAs, 401(k)s, etc.), the benefits of an SMA may not outweigh the cost or complexity. Likewise, if you don’t expect to incur significant capital gains in the near future, you may not need the versatility of an SMA.
For decades, mutual funds were the go-to investment management vehicle for broad diversification. Then came ETFs, which introduced an in-kind redemption structure with lower fees and a more efficient way to access the same market exposure.
SMAs are the next evolution of investment vehicle. With direct ownership, tax-loss harvesting, and customized portfolios that track an index while adapting to your specific goals, SMAs take investing to another level.”
They’re not right for everyone. But for some investors, SMAs can unlock advantages that traditional funds simply can’t.
If you're considering whether an SMA is right for you, you're likely in a financial position that could benefit from a customized strategy and trusted support. As outlined above, one-size-fits-all isn't the case when it comes to wealth planning.
Our 2-minute financial analysis is the first step toward crafting a personalized strategy based on your goals and opportunities.