As investors aim to tailor their portfolios to their desires and manage the tax fallout from their investments, assets in separately managed accounts (SMAs) are soaring and expected to reach $3.6 trillion in 2026. That is up from $1.4 trillion in 2018 and nearly $2.36 trillion in 2022, according to Cerulli Associates, a Boston-based research, analytics and consulting firm.
Also known as individually management accounts or separate accounts, SMAs are increasingly going mainstream as retail investors with at least six-figure portfolios tap into these investment vehicles. Through direct ownership, investors can minimize capital gains taxes and use tax-loss harvesting strategies, gain greater flexibility with their investments and experience greater transparency to monitor trades at any time.
“These accounts can be tailored to customer needs,” Katie D’Angelo, managing director and head of global relationship management at Allspring, said at a recent webinar. The tax efficiency of SMAs is another massive driver of their growth, she added. Allspring shared the Cerulli industry data at the webinar.
SMAs break down into three broad categories. One is direct indexing, where the underlying investments in an index are purchased individually in a taxable account. Second, municipal bonds are also often managed in SMAs. And the third is a combination of taxable fixed income and equities or other fixed-income categories.
Three Myths Plaguing SMAs
SMAs also have their share of detractors. Yet according to Allspring, some of the criticisms surrounding the fast-growing market segment of customized and direct-indexing SMAs can be misguided.
At the recent webinar, “SMArt Outcomes: Debunking Myths of Direct Indexing and Custom SMAs,” D’Angelo and Manju Boraiah, head of systematic edge fixed income and custom SMA at Allspring, laid out some of the myths that are accompanying the rapid expansion of the SMA market.
One myth is that direct indexing only applies to equities. Yet this is no longer true as direct indexing can be used in SMAs invested in the fixed-income markets, whether municipal bonds, corporate bonds or treasury bonds, he said.
Another myth is that custom SMAs focus only on passive investments. Also not true, said Boraiah, as there are multiple active choices for investing across fixed income, equities and alternatives, such as options.
The myth that systematic tax-loss harvesting only applies to equities is also false as fixed-income investments offer many opportunities for tax harvesting, he added.
Customized SMAs Gaining Popularity
Boraiah said he expects financial advisors, who now have about 7.5% of their practice assets in SMAs, according to Cerulli Associates, to increase this portion to 10%. “Customized SMAs are becoming more popular for financial advisors and investors,” he added.
While SMAs aren’t governed by a prospectus, the registered investment advisors who offer them must provide investors with an ADV brochure that outlines information about the advisory firm, its fees and services.
According to Cerulli, SMA assets under management grew from $951.5 billion in 2017 to $2.19 trillion in 2023. Managed accounts as a whole, including mutual fund advisory, exchange-traded-fund advisory and unified managed accounts, totaled about $11.5 trillion in 2023, according to the Cerulli Report “U.S. Managed Accounts 2023.”
D’Angelo and Boraiah are the co-architects of Remi, Allspring’s technology platform for SMAs and direct indexing. Headquartered in Charlotte, N.C., Allspring Global Investments is an independent asset management firm with more than $571 billion in assets, including just under $70 billion in SMAs, under advisement.
Three Myths Plaguing SMAs
