What Is a Separately Managed Account? You Own the Holdings, Not a Slice of a Pool

A separately managed account holds individual securities in your name, run by a manager to a stated strategy. You own the stocks or bonds directly. You do not own a share of a pooled fund.

That one difference drives everything else. Tax treatment, customization, transparency, cost. All of it follows from direct ownership.

How does a separately managed account work?

You open an account at a custodian. Schwab, Fidelity and Pershing are the common ones. The account is yours. Then you hire a manager and give them trading authority on it.

The manager runs a model. When the model says buy Microsoft, the manager trades it in your account. And in every other account on that model.

Trades are usually placed as a block and allocated across accounts. That keeps execution fair. Your holdings still drift a little from the model. You funded on a different day at a different price.

Your statement lists the actual shares. Not a fund name.

What is the difference between an SMA and a mutual fund or ETF?

A fund pools everyone's money. You buy a share of the pool. The pool has one cost basis history and one set of realized gains.

An SMA gives you your own copy of the strategy. Your cost basis is yours. Nobody else's redemptions create a taxable event in your account.

• Ownership. Fund: a share of a pool. SMA: the securities themselves.
• Tax lots. Fund: a shared history you inherited. SMA: your own, starting the day you funded.
• Customization. Fund: none. SMA: you can exclude a stock, a sector, or a whole industry.
• Transparency. Fund: holdings on a lag. SMA: daily, on your own statement.
• Minimum. Fund: one share. SMA: often $100,000 or more, though fractional shares have lowered that floor.

Why does direct ownership matter at tax time?

Because losses inside an index are invisible when you own the index as one line.

An index can be down for the year while a third of its members are up. Own the fund, and you see one number. Own the names, and you can sell the losers and book the loss. Then you buy something similar and stay invested.

That's tax-loss harvesting. It's the main reason advisors move taxable money into an SMA.

A worked example: inside the S&P 500 in 2022

The S&P 500 fell about 18% on a total-return basis in 2022. One line on a statement. One loss.

Underneath, the spread was enormous. Meta finished the year down about 64%. Tesla fell about 65%. Amazon fell about 50%. In the same index and the same year, Exxon Mobil rose about 80% and Chevron rose about 53%.

Own the index fund and you have one lot showing a loss. Hold the 500 names and you have dozens of lots deep in the red. Plus winners you never had to touch.

You harvest the losers in March, in June, and again in October. The strategy stays intact. The losses go on Schedule D.

2022 was unusual in its size. It was not unusual in its dispersion. Even in a strong year, roughly a third of index members finish lower.

What does a separately managed account cost?

You pay the manager a fee on assets, billed from the account each quarter. You also pay the custodian, though trading is commission-free at the major ones now.

Compare that against a fund's all-in cost, not against zero. A fund charges its fee inside the net asset value where you never see it. An SMA charges it on a statement line where you do. Same money. Different visibility.

When is a separately managed account the wrong answer?

Often. Here's when it fails.

In a retirement account. The tax machinery is the main reason to pay for an SMA. In an IRA there's nothing to harvest. Own the fund.

When the account is small. Below roughly $100,000 you can't hold enough names to track the strategy. The tracking error swamps the tax benefit.

When the strategy trades a lot. Harvesting needs losses. A high-turnover strategy in a rising market realizes gains instead. The tax bill then arrives every year.

After the first few years. Harvesting front-loads. Most of the benefit lands in years one through five. That's while lots still sit near their purchase price. A ten-year-old SMA in a market that went up is mostly embedded gains.

When the wash-sale rule bites. Buy a substantially identical security within 30 days either side of the loss sale and the loss is disallowed. That includes purchases in your IRA and your spouse's account. Harvesting badly is worse than not harvesting at all.

Where does a risk-managed strategy fit?

The same strategy can be delivered either way. THOR runs separately managed accounts for advisors and runs the same signal logic inside ETFs.

The approach is systematic and rules-based. It seeks to reduce drawdowns rather than forecast them.

The choice isn't about which wrapper wins. It's about the account. Taxable money with a long horizon and low-basis stock is an SMA problem. A retirement account is a fund problem. Most advisors end up running both.

Definitions

• Separately managed account (SMA). A portfolio of individual securities owned directly by one investor and managed to a stated strategy.
• Unified managed account (UMA). One account holding several SMA models plus funds, coordinated by a single overlay manager.
• Direct indexing. An SMA that replicates an index by holding its members, usually to harvest losses.
• Tax-loss harvesting. Selling a position below cost to realize a loss, then buying a similar security to stay invested.
• Wash sale. A disallowed loss, triggered by buying a substantially identical security within 30 days before or after the sale.
• Tracking error. How far the account's result drifts from the model it copies.
• Overlay manager. The party that sequences trades across several models in one account so they don't conflict.