Separately Managed Accounts: Customized Professional Portfolio Management
A separately managed account (SMA) is a portfolio of individual securities managed by a professional investment manager on your behalf. Unlike mutual funds, you own the individual securities directly. SMA assets exceeded $2 trillion in 2024, with the market growing 10%+ annually as investors seek tax customization.
Separately managed accounts offer advantages over mutual funds and ETFs for high-net-worth investors. Direct ownership: you own the individual stocks or bonds, not shares of a fund. This allows you to customize the portfolio — exclude specific stocks (e.g., tobacco, fossil fuels), manage realized gains and losses for tax optimization, and align the portfolio with your values (ESG screening). The manager makes all trading decisions within your account, similar to a mutual fund, but the account is yours alone. The portfolio is tailored to your risk tolerance, time horizon, tax situation, and preferences.
SMAs are most valuable for taxable accounts. The manager can harvest tax losses throughout the year, selling losing positions to offset gains from other accounts or up to $3,000 of ordinary income. This "tax overlay" is the primary benefit — a good SMA manager can add 0.5% to 1.5% per year in after-tax returns through tax-loss harvesting alone. For tax-deferred accounts (IRAs), the tax customization benefit disappears, making SMAs less attractive relative to low-cost ETFs or mutual funds. SMAs also enable "direct indexing" — owning the individual components of an index rather than an ETF — which allows harvesting losses on individual stocks while maintaining index-like exposure.
Real-world example: An investor with $1 million in a taxable account wants to track the S&P 500. With an S&P 500 ETF (VOO, 0.03% ER), they own shares of the ETF and cannot customize or harvest losses at the individual stock level. With an SMA using direct indexing, they own all 500 stocks individually. When Microsoft falls and Apple rises, the manager sells Microsoft at a loss (harvesting $3,000 of losses) and buys a substitute stock (like Cisco) to maintain index exposure while avoiding the wash-sale rule. Over a year, the manager may harvest $50,000 in losses, offsetting $50,000 in realized gains from other investments and $3,000 of ordinary income — saving approximately $12,000 in taxes (at 23.8% capital gains rate). The SMA fee (typically 0.20% to 0.50%) is partially or fully offset by the tax savings.
SMA vs. Mutual Fund vs. ETF
SMAs offer customization (exclude stocks, customize tax strategy, align with values) and tax efficiency (direct loss harvesting). Mutual funds offer simplicity (one transaction to buy/sell), lower minimums ($0 to $3,000), and no customization. ETFs offer the lowest fees (0.03% to 0.10%), tax efficiency (in-kind creation/redemption), and intraday trading — but no customization. SMAs typically have higher fees (0.20% to 0.50% for SMA management, plus underlying manager fees of 0.10% to 0.50%) and higher minimums. For most investors under $500,000, ETFs are the best choice. For taxable accounts over $500,000, an SMA with direct indexing can add significant after-tax value through customized tax management.
FAQs
What is the minimum for a separately managed account?
Minimums vary by provider and strategy. Traditional SMA minimums range from $50,000 to $500,000. Newer "direct indexing" SMA platforms like Wealthfront (Direct Indexing at $100,000), Schwab (SMA at $50,000), and Fidelity (SMA at $100,000) have lowered minimums. Custom ESG SMA platforms require $250,000+. Tax-loss harvesting focused SMAs are available from $100,000. For accounts under $100,000, the tax benefits of an SMA are unlikely to justify the higher fees compared to a simple ETF portfolio. As technology reduces management costs, minimums are expected to continue declining.
How are SMAs different from mutual funds?
In a mutual fund, you own shares of a pooled fund. The fund manager makes decisions for all shareholders. You cannot customize the portfolio — you get the same holdings as every other shareholder. In an SMA, you own individual securities directly. The manager manages your account separately, allowing customization. Mutual fund capital gains are distributed to all shareholders (including those who joined recently). SMA gains are realized at the account level — you control when to take gains. Mutual funds cannot harvest losses at the individual security level for your account. SMAs can. The downside: mutual funds are simpler (one ticker, one tax form). SMAs may generate many trades (and tax lots) that complicate tax reporting.
Are SMA fees tax-deductible?
SMA management fees were deductible as miscellaneous itemized deductions before the Tax Cuts and Jobs Act of 2017 eliminated most miscellaneous deductions through 2025. Under current law (2026), the deductibility of SMA fees depends on whether they are investment expenses subject to the 2% AGI floor — which was suspended through 2025. For 2026 and beyond, the rules may revert to pre-TCJA treatment, or Congress may extend the suspension. Consult a tax professional for current deductibility. Even without fee deductibility, SMAs can provide significant after-tax value through tax-loss harvesting that directly reduces your tax bill dollar-for-dollar.