{"id":3000,"date":"2015-11-10T19:06:32","date_gmt":"2015-11-11T00:06:32","guid":{"rendered":"http:\/\/162.223.13.186\/~zacksim\/how-does-an-sma-work\/"},"modified":"2022-02-26T13:23:03","modified_gmt":"2022-02-26T13:23:03","slug":"how-does-an-sma-work","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/how-does-an-sma-work\/","title":{"rendered":"How Does an SMA Work?"},"content":{"rendered":"<\/p>\n

Salsbury Cove, ME asks…<\/strong>How Does an SMA Work?<\/strong><\/em><\/p>\n

This is one of those questions we answer frequently — glad you asked!<\/p>\n

\u201cSMA\u201d stands for Separately Managed Account, and it refers to a portfolio of assets managed by an advisor or a money management firm. Perhaps the easiest way to understand SMAs is to think of them in contrast to mutual funds. A mutual fund is comprised of various types of securities (stocks, bonds, REITs, etc.) that are maintained by a portfolio manager. An investor does not actually own shares of the underlying securities in the fund. Instead, you own shares of the mutual fund itself, which is priced at the end of each day using a \u2018net asset value\u2019 (NAV).<\/p>\n

By contrast, a Separately Managed Account typically has an investment manager build you a custom portfolio using your assets to buy stocks, fixed income instruments and so forth in accordance with your goals. It\u2019s almost as if the manager is building you your own mutual fund, except you own shares of each security and you can generally customize it however you\u2019d like. If the portfolio manager purchased shares of Nike, Inc in your account, but you don\u2019t like that company, you can remove it from your portfolio. You can\u2019t do that in a mutual fund.<\/p>\n

There are a couple of advantages to having a Separately Managed Account:<\/p>\n

Customization<\/strong> \u2013 when a mutual fund is created and managed, it\u2019s not done specifically with your investment objectives in mind. SMAs can be constructed according to your goals and preferences, and managed dynamically with your changing financial situation. Mutual fund managers don\u2019t know anything about your goals \u2013 they are simply managing according to a set investment mandate or asset class, like \u2018large cap growth.\u2019<\/p>\n

Tax Efficiency <\/strong>\u2013 SMAs allow the portfolio manager more flexibility in controlling gains and losses for the individual investor. Since you own each security in your portfolio directly, you have more options for how you harvest gains and losses. In a mutual fund, the portfolio manager is making trades in the fund for tactical reasons but also to handle redemptions, and the investor generally has to absorb whatever capital gains taxes occur as a result.<\/p>\n

It\u2019s also possible that SMAs can have competitive fee structures when looked at side by side with a mutual fund, but it really just depends on the money manager and which mutual fund you\u2019re comparing.<\/p>\n

I won\u2019t go as far to say that SMAs are more advantageous than mutual funds. They are just different. In general \u2013 but not as a rule \u2013 mutual funds are better suited for investors with smaller amounts to invest, say $100,000 or less. The mutual fund can give that kind of investor broad diversification in one vehicle. With $100,000 or less, SMAs could present some diversification challenges. Amounts above that, however, can give the portfolio manager greater ability to spread assets around various securities and build a diversified portfolio.<\/p>\n","protected":false},"excerpt":{"rendered":"

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