SMAs can also have tax advantages over mutual funds and ETFs. In an SMA, you’re only responsible for tax liabilities on the individual securities you own and any trades that are made on your behalf. And with an SMA’s potential for customization, your provider may be able to apply tax-loss harvesting—a process of selling underperforming holdings to offset capital gains from stronger-performing holdings—within the SMA, which can lower your portfolio’s tax liabilities.

By contrast, mutual-fund shareholders may incur tax liabilities via capital-gains distributions. This happens when trade decisions by the portfolio-management team result in gains that are distributed to all fund shareholders. Capital-gains distributions tend to be less common with ETFs.

Important Considerations to Keep in Mind

As with all investments, SMAs may also have some potential risks and disadvantages, too. Just like a mutual fund or ETF, an SMA can underperform or lose value. Unlike a mutual fund or an ETF, in which you are removed from the investment process, a custom SMA may require more attention because of increased communication with your financial professional. And due to their greater customization potential and professional management, SMAs may incur higher management fees.

SMAs also have significantly larger investment minimums, often $50,000 to $100,000. For mutual funds, minimums are often just a few thousand dollars. ETFs can be traded on an exchange like a stock, so rather than an investment minimum, you pay the current market price of each share; prices vary depending on the ETF,  but a share price is often several hundred dollars or less. 

If you have the required minimum investment and would prefer to own your investments directly, but would still like professional account management, ask your financial professional if a separately managed account is right for you.