Separately Managed Accounts: The Complete Guide to Personalized Portfolio Management

For decades, personalized money management was formerly reserved for institutions and corporate clients, the domain of endowments, pension funds, and the ultra-wealthy. That is no longer the case.

Today, individual-oriented managed accounts have gone mainstream, and the shift is being driven by a fundamental desire that every serious investor shares. It is the desire for a portfolio of assets managed by a professional investment firm, built specifically for them, not for the masses.

According to Cerulli Associates, managed account assets rose 19.8% to $13.7 trillion in 2024 and are projected to grow at 12.3% annually, reaching $31.8 trillion by 2028, with retail SMAs expected to hit $3.6 trillion by 2026 (up from $778 billion in 2013).

Separately managed accounts are no longer a niche offering, they’re becoming a core part of the future of wealth management, and understanding how they work may be an important step in making smarter financial decisions.

Whether you are a financial advisor looking to better serve high-net-worth individuals, or an investor seeking portfolio management tailored to individual needs, this guide covers everything you need to know.

What Is a Separately Managed Account?

A separately managed account (SMA) is a portfolio of assets managed by a professional investment firm on behalf of a single investor. Unlike a mutual fund, which pools the money of thousands of investors into one shared portfolio, an SMA is customized specifically for a single client’s needs. It means the portfolio is unique to a single account, and all decisions are made at the account level.

The core distinction is ownership. In an SMA, you directly own the underlying securities,  the actual stocks and bonds in your portfolio. In contrast, a mutual fund is a company that invests in other companies, and investors hold shares of that fund rather than the underlying assets. This matters enormously for tax efficiency, investment customization, and greater transparency.

Firms offering SMAs are called registered investment advisors, and they operate under the regulatory auspices of the Investment Advisors Act of 1940 and are registered with the U.S. Securities and Exchange Commission (SEC). Prominent custodians such as Schwab and Fidelity offer SMA platforms to their clients, providing access to a wide range of strategies and managers.

In an SMA structure, one or more portfolio managers are responsible for day-to-day investment decisions, typically supported by a team of analysts, as well as operations and administrative staff who handle reporting, compliance, and client communication.

How SMAs Differ from Mutual Funds: A Side-by-Side Comparison

Understanding the difference between separately managed accounts and pooled vehicles like mutual funds is essential before making any investment decision.

According to CFA Institute guidance on investment management structures, separately managed accounts offer direct ownership of securities and greater control over investment decisions compared to mutual funds, where assets are pooled and managed collectively.

The Key Advantages of Separately Managed Accounts

Separately managed accounts offer key advantages in transparency, customization, tax efficiency, and personalized portfolio management.

1. Direct Ownership and Greater Transparency

When you invest in an SMA, you directly own the underlying securities. Your name is on every share of stock and bond in the portfolio. This means greater transparency and  you can see exactly what you own, when trades are made, and why decisions were taken. There is no black box.

This is in direct contrast to a mutual fund, where you have mutual ownership of the underlying securities and receive only periodic disclosures about what the fund holds.

2. Investment Customization and Personalization

One of the most powerful features of separately managed accounts is the high level of customization they afford. Unlike mutual funds or other pooled vehicles, an SMA can be shaped around your return objectives, risk tolerance, and special circumstances.

Investors can impose restrictions on how the account is managed. For example:

• You may choose not to invest in alcohol or tobacco companies
• You may wish to invest only in companies that are committed to some greater good, such as renewable energy or community development
• You may want to exclude certain investments for ethical considerations, such as weapons manufacturers or firms with poor labor practices

This makes SMAs the ideal vehicle for ESG-minded investors and anyone who wants their portfolio to reflect their values,  not just their financial goals.

SMAs are also preferred by style-based investors who want exposure to several different investment styles, such as large-cap value or small-cap growth,  while maintaining style-pure exposure through dedicated mandates rather than an all-cap blend core approach that blurs boundaries.

3. Tax Efficiency Through Tax Gain/Loss Harvesting

Perhaps the most compelling advantage of separately managed accounts over mutual funds is tax efficiency. Because you hold an individual cost basis on the underlying securities, your advisor can employ tax gain/loss harvesting, a strategy of selective realization of gains and losses designed to minimize capital gains tax liability.

How it works

If one holding in your SMA has declined in value, your manager can sell it to realize a loss, then use that loss to offset the gains from other positions, reducing considerably any capital gains tax liability. The proceeds from the sale can be reinvested in a similar security to maintain your portfolio’s strategic exposure while maintaining the balance in your account.

With a mutual fund, this level of control simply does not exist. Investors share the tax liability for capital gains incurred by the fund, meaning you could receive a large capital gains distribution at year-end even if you never personally profited,  a phenomenon known as embedded capital gains being embedded in the portfolio.

With an SMA, you will not be liable for capital gains generated prior to the day they invested, because you were not a shareholder then. This is a substantial advantage, particularly for high-income investors in elevated tax brackets.

4. Portfolio Management Tailored to Individual Needs

In an SMA, the objectives and constraints outlined in the investment policy statement serve as the foundation of the entire relationship. Your professional investment advisor takes into account your specific goals,  income generation, capital preservation, or long-term growth, and builds a strategy aligned with them.

This includes all asset-allocation decisions, money-manager selection, and ongoing portfolio customization as your life circumstances change. This is not a static, one-size-fits-all product. It is a tailored investment strategy that evolves with you.

Who Are SMAs Best Suited For?

The target audience for SMAs tend to be high-net-worth individuals though the landscape has evolved considerably. The investment management world is divided into retail and institutional investors, and SMAs historically served only the institutional side. Today, thanks to technology and competition among registered investment advisors, the growing universe of separately managed accounts has made them accessible to a much broader audience.

That said, the ideal candidate for an SMA is typically someone who:

• Has accumulated significant taxable assets and wants a more tax-efficient investment strategy
• Values greater control over asset selection and wants to exclude certain investments
• Is looking for professional portfolio management beyond what products designed for middle-income individual investors or retail classes of mutual funds can provide
• Has a significant initial investment available, typically starting at $100,000
• Has specific return objectives, risk tolerance, and special circumstances that a generic fund cannot accommodate

“SMAs are the bridge between institutional-quality investment management and the individual investor,” noted Katrina Lamb, CFA, in her research on managed account structures. “For investors seeking personalized investment strategies, they represent a fundamentally different experience than pooled vehicles.”

Understanding Minimum Investment Requirements

Minimum investment requirements vary significantly across the SMA market. Here is a breakdown:

Retail SMAs (Individual Investors)

• The price of entry starts at $100,000 for many mainstream managers
• Most retail platforms have account minimum balances between $100,000 and $5 million
• Technology and automation have pushed many managers to reduce their minimum investment requirements over the past decade
• Platforms like Schwab and Fidelity have helped democratize access by aggregating multiple managers and modest initial investment requirements

Institutional SMAs

• For strategies designed for institutional managers, minimum account sizes may range from $10 million to $100 million
• These are typically employed by pension funds, endowments, and family offices

The democratization of SMAs is one of the most important trends in wealth management today. According to Cerulli, from 2022 to 2024, SMAs experienced 30% asset growth, partly driven by falling minimums and improved technology infrastructure.

SMA Fee Structures: What to Expect

Fee structures vary considerably across the SMA industry, and understanding them is critical to evaluating total cost. Unlike a mutual fund, where costs are wrapped into the net expense ratio (including management fee, ancillary expenses, and potentially a distribution charge called a 12(b)1 fee and sales charges), SMA fees are disclosed transparently in the manager’s Form ADV Part 2.

Key things to know about SMA fees:

• Fees are typically expressed as a percentage of assets under management, structured on a scale in which the fee decreases as the asset volume increases
• Unlike mutual fund fees, SMA fees are subject to negotiation,  particularly at higher asset levels
• Additional costs may include transaction expenses and client and account services fees
• Mutual funds also carry sales charges that are disclosed in the fund prospectus; SMA investors should review Form ADV Parts 1 and 2 for full fee disclosure

When comparing an SMA to a mutual fund, always evaluate total cost,  not just the headline management fee. A slightly higher SMA fee may be offset substantially by tax efficiency gains and the elimination of embedded capital gains distributions.

Conducting Due Diligence: How to Select an SMA Manager

Conducting due diligence before selecting an SMA manager is one of the most important steps in the process. Necessary due diligence in selecting a manager should cover multiple dimensions:

Investment Philosophy and Process

• What is the manager’s investment philosophy and investment approach?
• Do they employ an active or passive style?
• Is the process top-down or bottom-up?
• How do they measure alpha and beta risk?
• What is the performance benchmark used, and how has the manager performed against it?

Team and Operations

• What are the roles and responsibilities of portfolio managers and the investment committee?
• What is the sell discipline, how and when are holdings removed from the portfolio?
• Who are the third-party providers used for transaction expenses and custody?
• How is the firm structured with respect to operations?
• What are the net client activity trends, and is the business growing?

Compensation and Alignment

• How is organization and compensation structured?
• Is incentive compensation aligned with those of the investor?
• Are managers rewarded for long-term performance or short-term asset gathering?

Regulatory and Compliance History

• What is the firm’s compliance history?
• Have they faced any fines or penalties from regulatory bodies?
• Are there any adverse legal situations disclosed in their Form ADV Parts 1 and 2?

It is recommended that phone or in-person meetings with a management representative be conducted as part of the selection process, particularly for large mandates. Review biographical information on key portfolio managers and ask for performance data spanning multiple market cycles.

How SMA Technology Is Transforming Portfolio Management

The rapid growth of separately managed accounts has been made possible not just by investor demand, but also by major advances in portfolio management technology. As SMA strategies scale across thousands of individualized accounts, firms increasingly rely on sophisticated systems to handle customization, tax optimization, and rebalancing efficiently.

Modern SMA platforms allow portfolio managers to implement investment strategies at the account level without losing consistency across the broader approach. This means each investor’s portfolio can reflect unique constraints, tax situations, and objectives, while still staying aligned with the manager’s overall investment philosophy.

Technology has also significantly improved tax management within SMAs. Automated systems can now identify opportunities for tax gain/loss harvesting in real time, helping reduce tax liability while maintaining target portfolio exposures. This level of precision was extremely difficult to achieve manually at scale.

In addition, risk monitoring tools now allow managers to view exposure across hundreds or even thousands of accounts simultaneously. This ensures that individual customization does not come at the expense of portfolio discipline or unintended risk concentration.

As a result, technology has become a key enabler of SMAs moving from a niche institutional solution to a widely adopted structure in modern wealth management.

SMAs vs. Mutual Funds: The Tax Efficiency Advantage in Detail

The tax advantage of separately managed accounts over mutual funds deserves deeper examination because for investors in high tax brackets, it can be the single most important factor in long-term wealth accumulation.

The Mutual Fund Tax Problem

When you invest in a mutual fund, you share the tax liability of the entire fund’s activity. If the fund manager sold a position at a large gain earlier in the year, before you even invested, you could still receive a capital gains distribution at year-end that is subject to tax. These are the embedded capital gains that are embedded in the portfolio, and as a new investor, you had no say in generating them.

The SMA Tax Advantage

In an SMA, you have an individual cost basis on the securities you hold. You are not liable for capital gains generated prior to the day they invested. Every tax decision, when to realize gains, when to harvest losses, how to time trades, is made at the account level with your specific tax situation in mind.

This is why tax gain/loss harvesting is so powerful within an SMA. Through the selective realization of gains and losses, your manager can offset the gains from appreciated positions with realized losses from underperformers, reducing considerably any capital gains tax liability for the year. 

The proceeds from the sale can be reinvested in economically similar securities, maintaining the balance in your account without meaningfully altering your investment exposure, a key principle in effective portfolio optimization.

The Role of Registered Investment Advisors in SMA Management

Firms offering SMAs are called registered investment advisors, and they play a central role in the entire SMA ecosystem. These firms operate under the regulatory auspices of the Investment Advisors Act of 1940, which requires them to act as fiduciaries, meaning they are legally obligated to act in your best interest.

The U.S. Securities and Exchange Commission (SEC) maintains oversight of registered investment advisors and requires them to file Form ADV Parts 1 and 2, which disclose everything from biographical information about key staff to compliance history, fee structures, and potential conflicts of interest.

When an advisor creates an SMA for you, they work within the objectives and constraints outlined in the investment policy statement, a document that captures your goals, risk tolerance, restrictions, and reporting preferences. This IPS serves as the governing framework for all portfolio transactions and ensures that portfolio transactions have expense and tax implications that are thoughtfully managed.

For those evaluating advisors, it helps to understand how experienced professionals stay informed through industry research and insights, including top publications for financial advisors.

Conclusion

Separately managed accounts offer a powerful combination of direct ownership, portfolio customization, and tax efficiency that traditional pooled investment vehicles often cannot match. 

For investors seeking greater control, transparency, and personalized portfolio management, separately managed accounts can be a compelling long-term wealth-building solution, especially when aligned with the right investment strategy and professional guidance.

Other Relevant Reads:

• Separately Managed Accounts vs Mutual Funds
• UMA vs SMA: Which Fits Your Advisory Practice?