SMA vs. mutual fund: How to choose the right vehicle
Choosing the right investment structure isn’t just about returns. It’s about control and how your portfolio fits into your broader financial goals. A separately managed account (SMA) can offer personalized portfolios and direct ownership of individual securities. Mutual funds and exchange-traded funds (ETFs) pool assets from many investors into the fund.
Read on to learn more about SMAs vs. mutual funds, including how SMA portfolios work and how they compare to mutual funds and ETFs. We’ll also show you how each can fit into a diversified portfolio and how other investments can help balance growth and income in your overall strategy.
What is SMA in finance?
Separately managed accounts are what investment managers may use to build personalized portfolios for high-net-worth individuals. These accounts include stocks, bonds, and other individual securities, all owned by the investor.
Custodians like major brokerages hold the assets while registered investment management firms manage the portfolio. Professional management can give the advisor the authority to make trades that align with the client’s needs and predetermined investment strategy. There are also non-discretionary SMAs which require the investor to approve each transaction.
SMAs can allow investors to set specific rules for asset selection, rebalancing, and capital gains management. This customization and structure helps to give the client full transparency and ownership over their investments and tax outcomes.
SMAs can have high minimum investment requirements, typically around $250,000 to $1 million. However, robo-advisors have helped make SMAs more accessible to smaller investors.
What is a mutual fund?
A mutual fund pools money from many investors to purchase a portfolio of securities, such as stocks, bonds, or money market instruments. Investors own shares of the fund, not the individual securities. Fund managers follow a prospectus, which defines the mutual fund’s strategy and goals.
Mutual funds are easy to access through brokers or fund companies. Investors can buy or redeem shares priced once daily using the fund’s end-of-day net asset value (NAV).
What is the difference between mutual funds and ETFs?
Both mutual funds and ETFs have professional management teams whose aim is to create portfolios that match the stated goals. But they have different structures and trading mechanics. Here’s a breakdown of the main differences.
SMA vs. mutual fund
Deciding between an SMA and mutual fund (or ETF) involves tradeoffs. SMAs can offer customization and control over investment selection and tax efficiency. Mutual funds can provide instant diversification with low barriers to entry.
Here are the primary pros and cons of each.
SMA pros
Investors looking for more control and visibility into how their money is managed should consider SMAs.
- Custom tax management: SMAs allow the investment manager to buy and sell securities strategically, using approaches such as tax loss harvesting, to align with an individual investor’s goals. Having control over taxes can help boost total returns.
- Full transparency and direct ownership: Investors own each security directly. This can provide greater control than viewing the aggregated holdings of a mutual fund portfolio.
- Customizable exclusions and concentration: You can avoid certain stocks for any reason, such as tax considerations, company fundamentals, or your social and environmental convictions.
SMA cons
While they offer more control, SMAs also typically come with higher costs and potential limits.
- Higher minimums and advisory fees: SMAs often require a higher barrier to entry than mutual funds. If you want a dedicated investment manager, you’ll typically need a six-figure investment and have to pay an advisory fee.
- More investor involvement: You have to find a firm or advisor with an investment management style you like. Then, you’ll need to work closely with your advisor to create a plan and update it along the way.
- Less diversification: Because you own individual securities, it can be more difficult to achieve broad diversification. Plus, smaller accounts may hold fewer securities, further increasing exposure risk.
Mutual funds pros
Widely accessible and easy to manage, mutual funds suit investors who want broad exposure without active involvement.
- Lower minimums and simpler onboarding: Most funds have low minimums and you can buy them directly from the fund company or your broker.
- Instant diversification across many holdings: Mutual funds and ETFs can spread risk and achieve diversification across a wide range of holdings.
- Cost efficiency: Funds that track indexes, such as the S&P 500, carry low expense ratios, often between 0.05% to 0.20%. This can make them ideal for long-term investors.
Mutual funds cons
Having to accept pooled decisions and dealing with tax consequences can make mutual funds less attractive.
- Less personalized tax management: Mutual funds distribute capital gains annually, regardless of your activity. This can trigger unexpected tax bills, and you won’t be able to use strategies like tax loss harvesting to help reduce taxable income.
- No direct security ownership: You own shares of the mutual fund, but you don’t hold individual securities. So, you have no control over selling specific assets or other decisions that can directly affect your tax situation.
- Restricted exclusions: Avoiding specific industries requires careful fund selection, which can be difficult. For example, if you don’t want to own companies engaged in the oil or tobacco industries, you’ll have to search for mutual funds and ETFs that don’t own these stocks.
UMA vs. SMA
A unified management account (UMA) is an advanced version of an SMA. It combines multiple strategies into one platform and can be designed for investors with complex portfolios.
UMAs may include SMAs, mutual funds, and ETFs alongside other investments, such as annuities and real estate. This structure centralizes reporting and can enhance tax efficiency by aligning all strategies under one umbrella.
Tax considerations and after-tax return
Tax treatment varies widely between SMAs and mutual funds. SMAs allow advisors to manage gains and losses strategically. Mutual funds distribute gains regardless of your activity.
Even if you don’t sell a single share of a mutual fund, you might have to pay capital gains tax on your holding. SMAs offer more control over timing and asset selection. This can lead to better after-tax returns – although don’t forget to factor in the cost of active management.
Due to the uniqueness of each investor’s situation, always consult a tax advisor before setting up accounts and committing to a long-term investment strategy.
Who should consider an SMA, and who should choose a mutual fund?
Investors’ needs vary based on their wealth, the complexity of their overall financial situation, and how involved they want to be in the investment process. Here’s things to consider when choosing between SMAs and mutual funds.
Simplify and secure retirement with Gainbridge
Separately managed accounts can provide flexibility and potential tax advantages for investors. Mutual funds and ETFs can help investors diversify across stocks, bonds, and other asset classes. The right choice for you depends on individual factors like financial goals and long-term investment strategy.
If your priority is investing today so you won’t run out of money in retirement, you may need to protect and grow your savings. Gainbridge digital-first annuities are designed to address these concerns, offering tax-advantaged growth and predictable income when you retire.
Explore Gainbridge today to learn how our annuities — with no hidden fees and commissions — can help you build a flexible retirement strategy that protects you from market losses and ensures you don’t outlive your money.
This article is for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. For advice concerning your own situation please contact the appropriate professional. The Gainbridge® digital platform provides informational and educational resources intended only for self-directed purposes. Guarantees are backed by the financial strength and claims-paying ability of the issuer. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results.
.jpeg)
