Separately Managed Account (SMA)

Separately Managed Account SMA Investments Securities Money Management Broker-Dealers Subadvisors Financial Portfolio
A Separately Managed Account (SMA) is a professionally managed portfolio of securities that uses pooled money to buy investments owned directly by the account holder. SMAs, also known as separate accounts, individually managed accounts, or managed accounts, are usually marketed by broker-dealers who select money managers, or subadvisors, for clients from a curated list.
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Overview

A Separately Managed Account (SMA) is an investment portfolio assembled by a brokerage firm or financial advisor on behalf of a single investor. Unlike mutual funds or other collective investment schemes where an individual’s funds are pooled with those of other investors, the owner of an SMA directly owns the underlying securities.

Key Features

  • Direct Ownership: Investors directly own the underlying securities in the SMA.
  • Customization: Investors can customize their portfolio based on individual preferences and financial goals.
  • Tax Efficiency: Due to direct ownership, investors can more effectively manage their tax situations.
  • Professional Management: SMAs are managed by professional money managers (subadvisors), providing expertise and management services.

Examples

  1. High-Net-Worth Individual Account: An investor with high net worth seeks to diversify their portfolio and uses an SMA for personalized asset allocation and tax efficiency.
  2. Institutional Account: A small foundation or trust that requires customized investment strategies might use an SMA to meet specific liquidity needs and restrictions based on donor requirements.
  3. Ethical Investing: An investor opts for an SMA to exclude certain stocks or sectors from their portfolio, such as tobacco or firearms, to align with personal ethical beliefs.

Frequently Asked Questions

What is the minimum investment for an SMA?

The minimum investment requirement for SMAs varies, but it typically ranges from $100,000 to $1 million, depending on the financial institution and the specific SMA offering.

How do SMAs differ from mutual funds?

Unlike mutual funds where investors collectively own shares of the pool, SMA investors own individual securities directly. SMAs offer more customization and potentially greater tax efficiency.

Are there any specific risks associated with SMAs?

SMA investors might face risks associated with the individual securities within the portfolio, market volatility, and liquidity issues. Professional managers aim to mitigate these risks through strategic asset allocation.

Can I have input on investment decisions in an SMA?

Yes, investors can provide input on investment decisions and restrictions, such as opting out of specific sectors or stocks, maintaining alignment with personal investment priorities.

How are SMAs taxed?

Investors in SMAs receive tax benefits due to direct security ownership, which allows for tailored tax loss harvesting strategies and personalized tax management.

Mutual Fund

A mutual fund is an investment vehicle that pools money from multiple investors to purchase a diversified portfolio of securities, managed by professionals.

Exchange-Traded Fund (ETF)

An ETF is an investment fund traded on stock exchanges, similar to stocks. It holds assets such as stocks, commodities, or bonds and generally operates with an arbitrage mechanism designed to keep it trading close to its net asset value.

Subadvisor

A subadvisor is a professional money manager selected by a brokerage or financial advisor to manage client funds within a separately managed account (SMA).

Online References

Suggested Books for Further Studies

  1. “Investment Analysis and Portfolio Management” by Frank K. Reilly and Keith C. Brown
  2. “The Intelligent Investor” by Benjamin Graham
  3. “Asset Management: A Systematic Approach to Factor Investing” by Andrew Ang

Fundamentals of Separately Managed Accounts (SMAs): Investment Management Basics Quiz

### What is an SMA primarily used for? - [x] Customizing portfolios for individual investors - [ ] Pooling investments from multiple investors - [ ] Managing day-to-day expenses of a company - [ ] Government bond investment > **Explanation:** An SMA is primarily used for customizing portfolios to meet the individual preferences and financial goals of a single investor. ### Who typically markets SMAs? - [ ] Individual investors - [ ] Banks - [x] Broker-dealers - [ ] Government agencies > **Explanation:** SMAs are usually marketed by broker-dealers who select money managers for clients from a pre-selected list. ### What kind of ownership do investors in an SMA have over the underlying securities? - [x] Direct ownership - [ ] Collective ownership - [ ] Leasehold interest - [ ] No ownership > **Explanation:** Investors in an SMA have direct ownership of the underlying securities in their portfolios. ### Which professional manages the investments within an SMA? - [ ] The investor - [ ] The SEC - [ ] Bank managers - [x] Subadvisors > **Explanation:** SMAs are managed by professional money managers known as subadvisors. ### Which feature allows an SMA investor to optimize tax situations? - [ ] Time diversification - [x] Direct ownership of securities - [ ] High liquidity - [ ] Immediate profit booking > **Explanation:** Due to direct ownership of the securities, SMAs allow investors to manage their tax situations more effectively. ### What's the typical minimum investment amount required for an SMA? - [ ] $1,000 - [ ] $10,000 - [x] Ranges from $100,000 to $1 million - [ ] No minimum investment > **Explanation:** The minimum investment requirement for an SMA typically ranges from $100,000 to $1 million, depending on the institution and specific offering. ### Can SMB investments be tailored to exclude specific sectors? - [x] Yes, they can be customized according to investor preferences. - [ ] No, they replicate index portfolios. - [ ] Only under special government programs. - [ ] Exclusively for high-risk sectors. > **Explanation:** SMAs can be tailored to exclude specific sectors or stocks, aligning with investors' preferences and ethical beliefs. ### What is a primary benefit of using a professional subadvisor in an SMA? - [x] Expertise in managing investments - [ ] Reducing tax obligations - [ ] Guaranteeing returns - [ ] Avoiding market fluctuations > **Explanation:** A primary benefit of using a professional subadvisor is their expertise in managing investments, helping to optimize portfolio performance. ### Which term refers to a fund that pools investors' money to invest in a diversified portfolio? - [x] Mutual Fund - [ ] SMA - [ ] REIT - [ ] ETF > **Explanation:** A mutual fund refers to an investment vehicle that pools money from multiple investors to purchase a diversified portfolio of securities. ### How do SMAs differ from mutual funds in terms of ownership? - [x] SMA investors own the securities directly, mutual fund investors own shares of the pooled assets. - [ ] They don't differ; both involve direct ownership. - [ ] Mutual funds allow more customization than SMAs. - [ ] SMAs are exclusively for bonds, mutual funds are for stocks. > **Explanation:** SMAs differ from mutual funds in that SMA investors own the securities directly, while mutual fund investors own shares of the pooled assets.

Thank you for exploring the intricacies of Separately Managed Accounts (SMAs) with us through this comprehensive review and interactive quiz. Keep investing in your knowledge!

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