Separately Managed Account (SMA): How It Works and When It May Fit
A separately managed account is a portfolio of individual securities owned directly by the investor and managed according to a specific strategy. Unlike a mutual fund or ETF, where you own shares of a pooled vehicle, an SMA gives you ownership of each underlying stock or bond. That direct ownership is what makes SMAs interesting for both investment management and tax planning, especially for high income earners, executives, business owners and families with taxable portfolios.
This guide explains how SMAs work, what they may offer and where the trade-offs are, for investors in Milwaukee, Madison, Brookfield and throughout Wisconsin. If you would like to see how your current portfolio structure affects your taxes, you can request a complimentary, no-obligation wealth and tax review.
How a Separately Managed Account Works
When you open an SMA, a portfolio manager builds and maintains a portfolio for you based on a defined strategy, such as large-cap equities, a dividend approach or a municipal bond ladder. The securities are held in an account in your name at a custodian. You can see each holding, each trade and the cost basis of every position.
Common types include:
Equity SMAs that follow an active strategy or track an index through direct indexing.
Fixed income SMAs that hold individual bonds, often municipal bonds for taxable investors. Our primer on what a bond is covers the basics.
Multi-strategy or unified managed accounts that combine several sleeves under one structure.
Account minimums vary by manager and strategy, and they have generally come down over time as technology has improved.
SMA vs Mutual Funds and ETFs
The core difference is ownership. In a mutual fund, investors share a single pool, so trading decisions and capital gains distributions affect everyone in the fund. A fund may distribute gains in a year when your own shares are down, simply because other investors redeemed. ETFs are often more tax-efficient than mutual funds because of how shares are created and redeemed, but you still own the fund rather than the individual stocks.
With a separately managed account, your cost basis is your own. Gains and losses are tied to your purchases and sales, not to other investors' behavior. That opens the door to several planning techniques. The trade-off is that SMAs can involve higher fees than low-cost index funds, more tax lots to track and more complex statements. Our article on financial advisory services fees explains how to evaluate costs.
Tax Advantages Worth Understanding
The potential tax features of an SMA are a major reason investors consider them:
Tax-loss harvesting: individual positions that decline can be sold to realize losses, which may offset gains elsewhere, while the portfolio stays invested through similar holdings. Wash sale rules apply.
Customized gain management: the manager can choose which tax lots to sell, and investors may set preferences around realizing gains in a given year.
Transitioning legacy portfolios: existing stock positions can sometimes be transferred in rather than sold, with gains realized gradually.
Charitable coordination: highly appreciated individual shares may be identified for gifting.
None of these features eliminates taxes, and results depend on markets, the investor's other income and how the account is managed. Our guide to tax-efficient investing strategies and our article on how to reduce capital gains tax offer more context.
Customization and Concentrated Positions
An SMA can be tailored in ways a pooled fund cannot. An investor may exclude certain companies or sectors for personal values, or avoid adding to an industry where they already have heavy exposure. A hypothetical executive in Green Bay who receives most of her compensation in employer stock, for example, might ask that her SMA exclude that company and its close competitors, so the overall household portfolio is better diversified. Our posts on restricted stock units cover how equity compensation can create concentration in the first place.
Similarly, a retired business owner in Appleton who holds a large position in one appreciated stock might use an SMA to diversify around it over several years, harvesting losses in other positions to help offset gains as the concentrated holding is trimmed.
When a Separately Managed Account May Make Sense
An SMA is not right for every investor. It may be worth discussing if several of these apply:
You have a sizable taxable account, not just retirement accounts where tax-loss harvesting has little effect.
You expect to realize capital gains from a business sale, real estate or concentrated stock.
You want to exclude specific companies, sectors or industries.
You value transparency into each holding and trade.
Your tax return is complex enough that coordination across accounts could matter.
For investors whose assets sit mostly in IRAs and 401(k) plans, or who prefer simplicity, low-cost funds may be a reasonable alternative. Asset location also matters; see our asset location strategy guide.
Questions to Ask Before Opening an SMA
If you are evaluating a separately managed account, a few questions can help clarify whether it fits:
What is the total cost, including the manager fee, advisory fee and any platform charges?
How does the manager decide when to harvest losses, and how are wash sales tracked across your other accounts?
Can existing positions be transferred in, and how will embedded gains be handled?
What customization is available, and are there limits on exclusions?
How will tax reporting arrive, and will it be coordinated with whoever prepares your return?
Clear answers to these questions may help you compare an SMA fairly against simpler fund-based portfolios.
Coordinating Your SMA With Tax Planning
An SMA's tax features work best when the people managing investments can see the tax return. Harvested losses, gain budgets and charitable plans all depend on what else is happening in a given year. Families in Kenosha, Racine and Eau Claire often find that a coordinated approach between wealth management and tax planning and preparation helps align portfolio decisions with year-end tax projections. To explore whether a separately managed account may fit your situation, request a complimentary, no-obligation wealth and tax review.
Frequently Asked Questions
What is a separately managed account?
A separately managed account is an investment portfolio of individual securities held in the investor's own name and managed according to a defined strategy. Unlike mutual funds or ETFs, the investor directly owns each stock or bond. That structure can allow greater transparency, customization and tax management, though it may involve higher costs and more complex reporting than pooled investment products.
How is an SMA different from a mutual fund?
In a mutual fund, investors own shares of a shared pool, so capital gains distributions and trading decisions affect everyone. In an SMA, you own the underlying securities directly and have your own cost basis. That means gains and losses reflect your own activity, and the portfolio can be customized with exclusions or tax preferences that a pooled fund typically cannot offer.
Can an SMA help with taxes?
It can help in some situations. Direct ownership allows tax-loss harvesting on individual positions, selection of specific tax lots, and gradual transitions out of appreciated holdings. These techniques may reduce or defer taxes, but results depend on markets, your other income and how the account is managed. They tend to be most relevant in taxable accounts rather than in IRAs or 401(k) plans.
Is direct indexing the same as an SMA?
Direct indexing is one type of SMA strategy. It aims to track an index by owning many of its individual stocks rather than buying an index fund. Because you own each stock, the manager can harvest losses or apply exclusions while staying close to the index. Other SMAs follow active stock-picking strategies or hold individual bonds rather than tracking an index.
Compound is a registered investment adviser. Registration does not imply a certain level of skill or training. This article is for informational and educational purposes only and should not be construed as personalized investment, tax, or legal advice. Tax laws are complex and subject to change. Strategies discussed may not be suitable for everyone, and there is no guarantee that any strategy will achieve its objectives or reduce taxes. Calculator results are hypothetical, are not guarantees of future results, and do not reflect any actual investment. Investing involves risk, including possible loss of principal. Please consult your tax, legal, and financial professionals before acting on any information in this article. For more information, see Compound's Form ADV, available at adviserinfo.sec.gov.
About Compound Wealth
Compound Wealth is an integrated tax, wealth management, accounting, and business transition firm serving business owners, professionals, real estate investors, and families. Rather than viewing financial decisions independently, the firm takes a coordinated approach that considers how tax planning, wealth management, accounting, and long-term planning often intersect. This planning-first philosophy helps clients evaluate financial decisions within the context of their broader objectives.
