Separately Managed Account

A separately managed account is an investment portfolio owned directly by one investor and managed on that investor's behalf by a professional investment manager, typically for an asset-based fee. The defining feature is direct ownership: the securities in the account, whether individual stocks, bonds, or both, are titled in the investor's own name, not held through shares of a pooled vehicle such as a mutual fund.

That structural difference from a mutual fund or ETF is the reason this kind of account exists as a distinct product. A mutual fund pools many investors' money into one shared portfolio; a separately managed account gives one investor a portfolio built and managed specifically for them, even where the manager runs many such accounts to a similar overall strategy.

Direct ownership of the underlying securities is what makes everything else about this account type possible. In a mutual fund, an investor owns shares of the fund, and the fund owns the underlying stocks and bonds; the investor has no ability to act on any one holding individually. In a separately managed account, the investor owns the stocks and bonds themselves. That distinction sounds technical, but it is the reason two features exist that a pooled fund cannot offer to an individual investor: loss harvesting at the position level, and customization of what the portfolio holds.

Tax-loss harvesting works differently, and more precisely, in a separately managed account than in a fund. Because each holding is owned individually, a manager can sell a specific position that has fallen below its purchase price to realize a loss for tax purposes, while leaving every other position in the account untouched, and then reinvest the proceeds in a similar but not substantially identical security to maintain the intended exposure. A mutual fund cannot do this for one shareholder alone; any tax consequence inside the fund is shared across all of its holders. A separately managed account's structure is what allows this kind of tax management to be applied continuously and at the level of individual positions rather than only at the level of the whole account. The mechanics of the loss-harvesting transaction itself, including the rule against repurchasing a substantially identical security too soon, are covered on the pages for tax-loss harvesting and the wash sale rule.

Customization is the second feature direct ownership unlocks. An investor in a separately managed account can typically instruct the manager to exclude specific companies, an entire industry, or a concentrated position the investor already holds elsewhere, such as employer stock. A pooled fund's portfolio is shared by every shareholder, so it cannot be altered to suit one investor's individual restrictions; a separately managed account's portfolio belongs to one investor alone, so it can be.

The closely related approach of direct indexing is a specific application of the same structure. Direct indexing means building a separately managed account designed to track a market index by holding its constituent stocks individually, rather than through an index fund, so the investor gets the same tax and customization benefits applied to an index-tracking strategy specifically. Direct indexing is a strategy carried out inside a separately managed account, not a separate account type.

The trade-offs run in the direction the added flexibility suggests. Managing an individual portfolio for one investor, rather than one shared portfolio for thousands of fund shareholders, costs more per account to administer, and separately managed accounts have historically required meaningfully higher minimum investments than a mutual fund or ETF, which has a minimum as low as the price of one share. They are typically paid for through an asset-based advisory fee on the account rather than a fund's built-in expense ratio, and where that fee is bundled together with trading and other services into a single all-inclusive charge, the arrangement is a wrap fee program specifically, which is covered on its own page.

An investor opens the account with a manager, who builds and continuously manages a portfolio of individual securities titled in that investor's name, following an agreed strategy and any exclusions the investor has specified, and charges an asset-based fee for the service.

A hypothetical example of the position-level tax management this structure allows. Farid holds a separately managed account worth $500,000, spread across roughly 80 individual stocks. One holding, purchased for $8,000, has fallen to $5,500, an unrealized loss of $2,500 ($8,000 − $5,500), while the rest of the account is up overall.

His manager sells that one position, realizing the $2,500 loss, and immediately buys a similar but not substantially identical stock in the same industry to keep Farid's overall exposure essentially unchanged. The realized loss can offset $2,500 of Farid's capital gains elsewhere for the year. None of the other 79 positions in the account are touched, and no other investor's account or tax position is affected by the transaction, in contrast to a mutual fund, where a decision like this is made once for the whole shared portfolio.

Pros

• Direct ownership allows tax-loss harvesting at the individual position level, continuously, rather than only at the level of a whole fund.
• The portfolio can be customized to exclude specific companies, an industry, or a position an investor already holds elsewhere, which a pooled fund cannot accommodate for one shareholder.
• Ownership of the underlying securities, rather than fund shares, gives full transparency into exactly what is held at any time.
• Can be built to track an index directly, capturing the tax and customization benefits of direct ownership alongside broad diversification.

Cons

• Typically requires a substantially higher minimum investment than a mutual fund or ETF, which puts it out of reach for many smaller accounts.
• Costs more to administer per investor than a pooled vehicle, which is generally reflected in the advisory fee charged.
• Managing many individual positions is more operationally complex than holding one fund, both for the manager and for tracking performance.
• The customization and tax benefits are only as valuable as an investor's actual need for them; an investor with simple goals and no concentrated positions may pay for flexibility they never use.