SMAs (Separately Managed Accounts)

A separately managed account holds individual securities, usually stocks or bonds, in your name, managed to a defined strategy by a professional manager. The difference from a mutual fund or ETF is ownership. In an SMA, you own each underlying position directly. The manager makes the buy and sell decisions inside the account, but every share, every cost basis, every dividend is yours.

That direct ownership unlocks two things pooled vehicles can’t offer: tax management at the individual security level, and customization to your situation.

How it works

• You fund the account with cash or transfer in eligible securities.
• The manager implements the strategy by buying individual stocks (or bonds) in your name, typically 50 to 300 positions depending on the approach.
• You see every position, every trade, every cost basis on your statement.
• The manager harvests losses on specific holdings throughout the year, selling positions trading below cost to generate realized losses that offset gains elsewhere in your tax return.
• You can request restrictions, exclude specific stocks, sectors, or ESG factors, or fold in low-basis legacy positions you don’t want sold.
• Fees are typically a single management fee on assets, often 0.25% to 0.65% depending on strategy and account size.

Who it’s for

SMAs fit best when account size and tax situation make the structural advantages worth the complexity:

• Taxable accounts of roughly $250,000 and up where annual tax-loss harvesting can generate meaningful realized losses.
• Investors in higher tax brackets who can use those losses against capital gains from other parts of the portfolio, including concentrated stock sales.
• Anyone with values-based restrictions they want enforced (no tobacco, no firearms, screen for specific ESG criteria).
• Investors transitioning into a portfolio with embedded gains who need a manager who can unwind positions tax-efficiently over time.

They’re overkill for small taxable balances and add no tax benefit inside an IRA or 401(k), since losses inside a tax-deferred account can’t be harvested for tax purposes anyway.

Real numbers

Consider a $500,000 taxable SMA tracking a large-cap U.S. equity strategy. In a typical year, even when the broad market is up, individual holdings move at different paces and the manager identifies positions trading below their lot-level cost basis. Tax-loss harvesting in a diversified SMA commonly produces realized losses worth 1% to 2% of account value per year in normal markets, more in volatile years. On $500,000, that’s $5,000 to $10,000 of harvested losses annually. If you offset long-term gains taxed at 23.8% (including the net investment income tax), the after-tax benefit is roughly $1,200 to $2,400 per year, compounding alongside the portfolio’s growth.

Where it fits in a portfolio

SMAs are the equity workhorse for larger taxable accounts where after-tax return is the metric that matters. They typically replace a chunk of what would otherwise sit in equity ETFs or index mutual funds, and they pair naturally with ETFs for asset classes where SMAs don’t add value (broad bond exposure, small allocations to emerging markets, niche sleeves). For families coordinating gifting and charitable strategies, the security-level cost basis tracking also makes SMAs useful for identifying the most appreciated lots to donate.

Common pitfalls

• Using an SMA inside an IRA. The tax-management edge evaporates, and you’re paying for a service you can’t benefit from.
• Layering multiple SMAs with overlapping holdings. Two large-cap U.S. SMAs from different managers may own the same 60 stocks, defeating the diversification you thought you were getting.
• Forgetting wash-sale rules across linked accounts. If your spouse’s IRA buys the same security you just sold for a loss in your SMA, you can disallow the loss.