Separately Managed Account (SMA)

Professionally managed portfolio of securities that uses pooled money to buy investments owned directly by the account holder. SMAs, also called separate accounts, individually managed accounts, or managed accounts, are usually marketed by broker-dealers, who select money managers, called subadvisors, for clients from a selected list. (An alternative to subadvisor programs, called open architecture programs, allows investors to choose from a much broader menu of managers with more flexible pricing arrangements.) A phenomenon of computer technology and mass affluence, SMAs offer customized professional management to clients with as little as $100,000 for fees of 2% or less. With assets of more than $1 trillion in 2005 and a 20% annual growth rate, they are challenging mutual funds' preeminence as wealth-management vehicles. The chief advantage of SMAs over mutual funds is direct ownership of securities in the portfolio. This permits customization (the investor can, for example, restrict investments in tobacco and gambling without having to buy a socially conscious fund), and provides individual Cost Basis for income tax purposes; the investor, unlike a mutual fund investor, thus has control of the tax consequences of the timing of purchases and Realized Profit or Loss. Morningstar Rating System has started giving star ratings to SMAs through its Morningstar Principia Separate Accounts database. A variation, ETF-SMAs, which are separately managed accounts composed of Exchange-Traded Funds (Etfs) is a professionally run asset allocation service that is rapidly gaining popularity. IXIS Asset Management Advisors of Boston, for example, calls its product MEPs, for Managed ETF Portfolios.