The Separately Managed Account (SMA) Makes Little Sense

Wall Street's latest gimmick to get your money is the separately managed account (SMA). Unlike a mutual fund the SMA is a supposedly "customized" portfolio of stocks and bonds tailored to your investment style and tended to by a professional manager that you and your broker select. The manager buys large blocks of stocks and bonds and then allocates them among all the owners of his SMAs. So an aggressive investor gets a few shares of potentially high-return stocks and the conservative investor receives safer picks. In theory each portfolio looks different, but in reality the portfolios of like-minded investors will be very similar. You may, however, specify that certain types of stocks be excluded from your portfolio. For example, perhaps you don't want to own tobacco stocks.

For all this stock picking and trading you pay a handsome fee. Annual fees from 1% to 3% of the account value are not uncommon. So for a $250,000 account you could pay up to $7,500 in a single year. These fees rival the highest mutual fund fees.

The SMA doesn't make much sense for average investors. Your profits will be determined by the fees you pay and your manager's performance. If you pick a good manager, you could make a lot of money. But remember that most mutual fund managers don't consistently beat the market so why should managers of SMAs be any different.