Both mutual funds and separately managed accounts (SMAs) can be effective tools for building diversified portfolios, as they invest in similar asset classes, geographies and underlying securities. But key distinctions set them apart. Use this guide to decide which vehicle makes sense for your individual clients.
| Separately Managed Accounts | Mutual Funds | |
|---|---|---|
| Yes—all decisions adhere to the investment guidelines and are made independently by the investment manager. |  Professional | Yes—a manager makes all decisions based on the investment guidelines (active fund) or oversees the fund (passive fund). |
| Investors own stocks and bonds directly, with an individual cost basis for each security, providing more control over when to realize gains or losses. |  Security ownership | Investors own shares of the mutual fund, which in turn owns the underlying investments |
| In-kind transfer of existing securities and/or cash. |  Investment funding | Cash only. |
| Single contract SMA average: 24–35 bp.1 |  Cost | Active fund average: 52 bp.1 |
| Investors can establish reasonable guidelines for managing their investments by excluding certain securities or industries or tilting toward a particular factor.2 |  Customization | All mutual fund shareholders have the same holdings. |
| Typically three days. Usually have unlimited withdrawals/redemptions. |  Liquidity | Typically next day. May have restrictions on number of withdrawals/redemptions. |
| Since investors own the individual securities, they may avoid capital gains distributions typically made by mutual funds and ETFs, and they can offset gains from one security with losses from another. |  Tax Efficiency | Investors do not have their own cost basis. Capital gains are distributed on a regular basis, regardless of security sale. Embedded unrealized capital gains are 20% for the average fund.3 |
| Clients have daily visibility into their holdings. |  Transparency | Funds disclose holdings on a quarterly basis. |
| Transfer of in-kind securities lowers potential capital gains when liquidating an existing portfolio. |  Portability of | Underlying holdings of the mutual fund are not transferable |
Investment decisions are unaffected by other investors’ redemption requests. There is only one investor: your client. SMA is fully invested and not required to hold liquidity buffer. |  Redemptions | High redemption requests may force manager to sell securities to raise cash during highly volatile or down markets. Rule 22e-4 liquidity requirements may compel funds to hold cash or cash-like securities. |
…desiring investment portfolios aligned with their circumstances and values. …seeking enhanced tax efficiency and the ability to harvest losses to reduce capital gains. …managing their own portfolios of individual securities, but who now desire the expertise of a professional manager. …wanting to leave a legacy. (Securities passed to heirs experience a step-up in basis). …with charitable intentions. By gifting low-basis, highly appreciated shares, investors may potentially receive a charitable tax deduction. They may also avoid paying tax on the shares. |  Best fit for individuals… | …investing any level of assets, from as little as $1k to hundreds of thousands or more. …searching for more options for low-risk, passive index strategies that deliver market returns. …looking for a wide range of investment strategies, asset classes, capitalization sizes and geographies in the public markets. …seeking access to select alternative, private markets, or niche strategies. |