What are separately managed accounts? Customizing your portfolio with SMAs

As your financial life changes, your investment approach may need to change with it.

Maybe you’ve built a portfolio over the years and now want more say in what you own. Maybe you have specific companies or industries you’d prefer to avoid. Or perhaps your financial picture has become more complex, and you’re looking for ways to manage your investments with your tax situation in mind.

When you reach that point, you may start looking beyond a traditional mutual fund or exchange-traded fund (ETF). One option to consider is a separately managed account.

Separately managed accounts (SMAs) can give you more control over the individual securities in your portfolio while still offering the support of professional investment management. That combination can offer flexibility that appeals to some investors, but it also can come with higher minimums, fees and complexity. Read on for help deciding if SMAs are right for your investment goals.

An SMA is an investment account that holds individual securities and is professionally managed according to a specific investment strategy. That direct ownership is one of the key differences between an SMA and a pooled investment.

When you invest in a mutual fund or ETF, your money joins money from other investors. You own shares of the fund, while the fund owns the underlying stocks, bonds or other investments.

With an SMA, you generally own the individual securities directly in your account. That structure can give you more visibility into what you own and, depending on the program, more opportunities to customize your portfolio.

With an SMA, you, your financial advisor and an investment manager each play a role. Your advisor can help you select a strategy that fits your goals and broader financial picture, while an investment manager handles the day-to-day investment decisions.

You and your financial advisor can start by discussing your goals and what you want your investments to do for you. Your answers can help determine what types of investment strategies may make sense.

An SMA strategy might focus on equities, fixed income or another asset class. It also could use a particular investment approach or model portfolio. The key is that the SMA itself doesn't determine the investments. The strategy does.

Depending on the SMA program, the investment manager may have discretionary investment management authority, meaning they can make day-to-day investment decisions within the parameters of your chosen strategy without asking you to approve each individual trade.

Once your SMA is up and running, an investment manager takes care of day-to-day decisions, including researching investments, deciding when to buy or sell individual securities and adjusting the portfolio as market conditions or the strategy change.

Meanwhile, your financial advisor can help you keep the bigger picture in view. They can review your portfolio with you and help you determine whether your investment strategy still fits as your life changes. Maybe your priorities shift, you add new investments or your tax situation looks different than it did when you opened the account.

With an SMA, you have a professionally managed portfolio while still having a direct connection to the individual securities you own.

With an SMA, you own the individual investments in your account, while a professional manages the portfolio with your goals and preferences in mind. Mutual funds and ETFs work differently. They pool money from many investors, and you own shares of the fund rather than the underlying investments themselves.

The biggest takeaway? With an SMA, you generally have direct ownership of the securities in your account. That can create opportunities for more customization and tax management.

But those additional options can come at a cost. SMAs generally have higher investment minimums than mutual funds and ETFs. They also may charge an asset-based fee, and managing a portfolio of individual securities can add complexity.

When you own individual securities directly, you may have more flexibility to shape your portfolio around the things that matter to you.

Depending on the SMA program and strategy, you may be able to exclude certain companies, industries or securities based on your existing holdings or what matters to you.

For example, if you already own a significant amount of your employer's stock, you may want to avoid adding more exposure to that company. Or you may prefer to limit investments in industries such as tobacco or gambling or fossil fuels.

Your financial advisor and investment manager can consider those preferences alongside your goals and existing investments. The point isn't customization for its own sake. It's shaping your investment strategy around the bigger picture of your financial life and what matters to you.

Direct ownership also can give an investment manager more opportunities to consider your tax situation.

For example, some SMA strategies may use tax-loss harvesting in non-retirement accounts. This involves selling certain investments that have declined in value to potentially offset capital gains. Because you own the individual securities directly, the investment manager can make decisions at the security level rather than relying solely on the transactions made inside a pooled fund.

Not every SMA provides the same tax benefits. And tax-loss harvesting isn't appropriate for everyone. Tax outcomes depend on your individual circumstances, and there's no guarantee that any singular tax strategy will reduce what you owe.

Direct indexing is an investment strategy that lets you own individual stocks or other securities that make up an index rather than investing in a mutual fund or ETF that tracks it. It can be implemented through an SMA.

Think of it this way: An SMA is the way your investments are held and managed, while direct indexing is one strategy you can use within that account. They aren't the same thing, but they can work together to give you more flexibility and personalization.

Other SMA strategies can focus on different asset classes or investment approaches, and you’ll want to discuss all your available options with your financial advisor. That conversation can help connect the technical side of investing, such as securities, taxes and asset allocation, with the things you're working toward.

While an SMA can offer more control, control doesn’t necessarily mean value or the right fit for your circumstances. Consider how these potential benefits and drawbacks line up with your goals.

• Greater visibility. You generally can see the individual securities you own on your account statement rather than simply seeing the holdings of a mutual fund or ETF.
• More customization. Depending on the strategy, you may have opportunities to include or exclude individual securities and make other adjustments based on your circumstances.
• Potential tax-management opportunities. Direct ownership can allow investment managers to consider gains and losses at the individual-security level.
• Professional management. An investment manager handles day-to-day decisions within the selected strategy, while your financial advisor can help you understand how the account fits into your overall plan.

• Higher investment minimums. SMAs generally require more money to get started than many mutual funds and ETFs.
• Fees. SMA programs typically charge an asset-based fee for professional management. Other fees may apply, depending on the program.
• More complexity. Owning individual securities can give you more information and control, but it also can make your portfolio more complex to understand and evaluate.
• You may not need the flexibility. If you're primarily looking for a simple, low-cost way to get broad market exposure, a mutual fund or ETF may meet your needs without the additional investment minimum or complexity of an SMA.

There's no universal SMA minimum investment. Minimums vary by investment manager, strategy and program. For example, Thrivent's current retail SMA offerings have minimum investments of $100,000 per equity manager and $250,000 per fixed-income manager.

Begin by talking with your financial advisor about your financial picture, including your goals, the investments you already own, your preferences and what you want your portfolio to accomplish. You don't need to know exactly which strategy you want going into the conversation.

Here are some questions to ask:

1. What investment strategy would this SMA use?
2. What's the minimum investment and what fees would I pay?
3. How much customization does the strategy allow?
4. How would this account work with my existing investments?
5. What tax-management opportunities are available?
6. Who manages the individual securities and how often should we review the account?

Those answers can help you determine whether an SMA's additional flexibility would make a meaningful difference for you.