Separate accounts (SA), also called separately managed accounts (SMAs), are investment portfolios managed by professionals on behalf of an individual. Unlike mutual fund or any other commingled fund, this investment vehicle is essentially having your own fund manager pick all your investments.

Separate accounts are typically opened through a brokerage or money management firm, though they may also be held at a bank or opened with an insurance company. Commonly utilized by high net worth investors, SAs can contain a variety of stocks, bonds, and other asset types.

While they are a great fit for some investors, they are not for everyone. Some investors are better off sticking to commingled funds.

key takeaways

  • Separate accounts, aka separately managed accounts, involve an individual working with his or her own professional money manager.
  • Separate accounts provide investors with greater liquidity, control, and customization of their portfolios.
  • Separate accounts also involve more risk and volatility, and demand diligence and intelligence on the investor's part.

Immediate Liquidity

Separate accounts tend to be more liquid than their commingled counterparts, so investors who need easy access to their money or the ability to frequently change their investments can do well with a SA. However, if you do not need to maintain immediate access to your money, placing your money in a commingled fund may be a better and less volatile option.

Customized Investment Approach

SAs allow investors to personalize their investment strategies. For instance, an investor may opt to only invest in companies with a mix of international and domestic operations or to focus on a certain industry as a hedge against other investments. Commingled accounts often include such a broad mix of investments that finding a portfolio to fit such specific requirements may be next to impossible. However, if you do not require that level of specificity and are only focused on getting a return, commingled accounts may be a more appropriate option.

  • Greater liquidity

  • Customized, more controlled strategy

  • Higher degree of risk

  • Need for investor sophistication, diligence

Diligence Required

Having a dedicated manager for your investment, like in a separate account, requires some personal input. You need to have an understanding of different investments, the benchmarks used for performance and the parameters by which your account manager handles your investments. If you do not have the time to devote to doing this properly or the knowledge to fully understand the concepts presented, sticking with a commingled account is likely safer. In commingled accounts, a fund manager is constantly tweaking the portfolio distribution, trying to earn you the best return with the lowest risk possible.

Many brokerages and investment management firms have minimums for separate accounts—at least six figures, and sometimes upwards of $250,000.

Greater Risk

Separate accounts tend to be riskier than commingled funds. You have to consider credit risk as well as liquidity risk, and there is interest rate risk and spread risk to take into account. In commingled accounts, the risk is much more generalized. These issues still exist, but they are handled without your involvement.