Separately Managed Accounts (SMAs)

A Separately Managed Account (SMA), sometimes called a wrap account, is a premium investment vehicle where a professional portfolio manager builds and manages a personalized portfolio of individual securities on behalf of a single investor. Think of it as the investing equivalent of getting a bespoke suit versus buying one off the rack. Unlike a mutual fund or an exchange-traded fund (ETF), where your money is pooled with thousands of other investors to buy shares in a pre-set portfolio, an SMA provides you with a private account containing stocks, bonds, and other assets that you own directly. This direct ownership is the secret sauce that gives SMAs their unique advantages. However, this high-touch service typically comes with a high price of admission, with minimum investment amounts often starting at $100,000 and frequently reaching $1 million or more, traditionally making them the domain of high-net-worth individuals and institutions.

The process is more personal than just clicking “buy” on a fund. It’s a collaborative journey between you and your money manager.

1. 1. The Consultation: It begins with a deep conversation. You'll sit down with a financial advisor or the portfolio manager to discuss your financial goals, time horizon, tolerance for risk, and personal values. Do you want to focus on generating income, aggressive growth, or preserving capital? Are there industries (like tobacco or fossil fuels) you want to exclude? This is where your unique investment mandate is created.
2. 2. The Portfolio Construction: Armed with your personal blueprint, the manager gets to work. They will open a brokerage account in your name at a custodian (like Schwab or Fidelity) and begin purchasing individual securities—like shares of Apple, bonds from Johnson & Johnson, etc.—to construct a portfolio tailored just for you.
3. 3. Ongoing Management & Reporting: This isn't a “set it and forget it” product. The manager actively oversees your portfolio, making adjustments based on market conditions and your evolving goals. You receive highly detailed reports showing every single holding, every trade made, and a clear breakdown of fees. You're not just a shareholder in a fund; you're the direct owner of the assets.

For those who can meet the minimums, SMAs offer a compelling suite of benefits that mass-market products simply can't match.

This is the headline feature. Because you own the individual securities, you have a level of control that is impossible in a pooled fund.

• Stock Restrictions: If you already own a large amount of your company's stock, you can instruct the manager to avoid buying more, preventing over-concentration.
• Ethical Screens: You can easily implement Environmental, Social, and Governance (ESG) criteria or other ethical screens, ensuring your portfolio aligns with your personal values.
• Strategic Tilts: Want to overweight a specific sector you believe in? Or follow a niche strategy like owning only companies with female CEOs? An SMA can be built to do that.

This is arguably the most powerful, and often overlooked, advantage.

• Tax-loss harvesting: Since you own each stock individually, your manager can strategically sell specific losing positions to realize a loss. This loss can then be used to offset taxable gains from winning investments elsewhere in your portfolio, potentially lowering your capital gains tax bill significantly. In a mutual fund, you have no control over the fund's internal trading, which can sometimes leave you with a surprise tax bill even if your fund's value went down.
• Tax-Aware Transitions: If you're moving a large, existing portfolio with significant embedded gains, a manager can carefully transition it over time to minimize the tax impact, a feat that's clumsy at best with mutual funds.

With an SMA, there are no mysteries. You have a 24/7 window into your portfolio. You can log in anytime and see every single stock and bond you own, in real-time. This is a stark contrast to mutual funds, which are only required to disclose their full holdings periodically, often with a significant lag.

SMAs are a specialized tool, not a universal solution. Their exclusivity and complexity bring some notable drawbacks.

As mentioned, SMAs are not for the small investor. The high level of personalization makes it uneconomical for managers to offer them for small sums. While some “model portfolio” SMA products are emerging with lower minimums (e.g., $25,000 - $50,000), the truly bespoke offerings remain in the six-figure-and-up club.

Personalized service costs more. SMA fees are typically charged as a percentage of assets under management (AUM) and often range from 0.50% to over 2.0% annually. This is considerably higher than the razor-thin expense ratios of many ETFs and index funds. You must be confident that the benefits of customization and tax management will outweigh these higher costs.

Your SMA's success is almost entirely dependent on the skill, strategy, and integrity of the portfolio manager. Unlike buying a broad market ETF, where the manager's role is minimal, here you are betting on a specific person or team. This requires significant due diligence to find a manager whose investment philosophy, track record, and communication style are a good fit for you.

For the successful value investing practitioner, an SMA can be an exceptionally powerful tool. The core tenets of value investing—patience, concentrated bets on undervalued companies, and a long-term mindset—align perfectly with the structure of an SMA. A value investor can hire a manager who specializes in their specific brand of value—be it deep value, quality-at-a-reasonable-price, or special situations. The ability to hold a concentrated portfolio of 15-20 of the manager's best ideas, without the diversification constraints of a typical mutual fund, is highly appealing. Furthermore, the tax-loss harvesting capabilities are invaluable for a strategy that may involve holding stocks for many years, allowing a manager to trim positions and manage taxes opportunistically. In many ways, the original partnerships run by legends like Warren Buffett and Benjamin Graham were the spiritual ancestors of today's SMAs: a skilled manager deploying capital for a select group of partners with a shared philosophy and a long-term vision.