Personalization is no longer a luxury for RIAs to offer to their clients. Instead, it’s now the norm for investment strategies. As investors look for ways to align their portfolios with their own specific goals, values, or tax situations, they’re turning to solutions and advisors that offer more control than traditional funds.
Direct indexing is one way to achieve this. Another is through separately managed accounts, or SMAs.
This article explores how SMAs work, and more importantly it covers how they compare to other personalized investing strategies like direct indexing. Understanding the differences can help financial professionals make an informed decision about which kinds of strategies make the most sense to offer to their clients.
Personalized Investing: Why It Matters
For years, many investment strategies offered by advisory firms followed a one-size-fits-most model. You choose the funds, set target allocations, and group clients into one of those predetermined models well enough to fit their overall risk tolerance and long-term plans.
But that model has its limits. What if a client wants to avoid companies in a certain industry? Or take advantage of tax-loss harvesting? Or manage a complex portfolio that fits different business or estate planning needs?
That’s where personalized investing comes in, and where SMAs and direct indexing have emerged as two powerful solutions. They both allow you to move beyond cookie-cutter portfolios and create something that reflects each individual client. And do it without a tremendous manual workload.
What is an SMA?
If you’re a longtime advisor, you’ll likely know this. So feel free to skip down to the differences between SMAs and Direct Indexing. But if you’re new to the game, stay right here.
A separately managed account (SMA) is a portfolio of individual securities that’s managed by a professional on your behalf. Unlike a mutual fund or ETF, where money is pooled with other investors, an SMA gives each client direct ownership of the underlying securities.
Because it’s built specifically for an individual’s financial goals, tax preferences, and values, an SMA offers a high level of customization. Think of it as a tailor-made suit rather than one off the rack. And everybody wants that, right?
SMAs have traditionally been used by high-net-worth individuals who want their investments actively managed and closely aligned with personal preferences. But with more flexible platforms and new technologies, they’re becoming more accessible and relevant to a wider audience.
Not only do they make sense for more individual investors, they also make more sense for the RIAs who serve them too.
How SMAs Work
When you open an SMA for a client,, a portfolio manager outside your firm usually takes the reins. They research and select investments on your behalf, adjusting the holdings based on market trends, tax considerations, or changes in your strategy.
Here’s what you can typically expect:
- Customization: You can request to exclude specific sectors (e.g. fossil fuels or firearms), align with environmental or social governance (ESG) criteria, or concentrate on certain industries you believe in.
- Tax management: Because each client holds individual securities, your manager can implement tax-loss harvesting strategies at the individual position level, potentially improving after-tax returns.
- Ongoing monitoring: The manager actively rebalances the portfolio, aiming to keep it aligned with your stated goals.
This level of involvement means you and your clients aren’t just picking an off-the-rack fund—you’re shaping the philosophy behind each portfolio with an outside investment professional guiding the process.
SMA vs. Direct Indexing: Key Differences
Both SMAs and direct indexing allow for personalization, but they differ in how much control clients have, how decisions are made, and how much they cost.
Here’s a side-by-side look at how they compare:
| Feature | Separately Managed Account (SMA) | Direct Indexing (DI) |
| Customization | High: Guided by portfolio manager | High: Guided by you |
| Tax Efficiency | Yes: Manager-dependent | Yes: Automated and rules-based |
| Investment Control | Managed professionally | You direct preferences |
| Minimum Investment | Higher (often $100K+) | Usually lower thresholds, or even none at all |
| Fee Structure | Higher: Includes management fees | Lower: Automation reduces overhead |
| Technology Integration | Traditional wealth platforms and spreadsheets | Modern, AI-driven platforms like Alphathena |
If you’re an RIA that doesn’t want to control investing and instead wants full-service oversight and a human manager steering your clients’ investments, an SMA may be the right choice.
But if you prefer to shape portfolios yourself, while still benefiting from automation and efficiency so you don’t overwork yourself, direct indexing might be a better fit.
Explore how direct indexing works with Alphathena
Who Should Consider an SMA?
An SMA might be a good fit for your client if:
- You have a more complex financial situation that could benefit from active tax management.
- Your client is looking for a customized strategy that aligns with their business, estate planning, or philanthropic goals.
- You value the experience and oversight of a professional manager to assist your investment management process.
- You’re serving clients who meet the higher minimum investment requirement (often $100,000 or more).
What to Consider Before Choosing an SMA
While SMAs offer flexibility and professional oversight, they come with a few potential downsides, including: higher minimums (many SMA providers require large initial investments, though that’s evolving as platforms become more competitive), as well as higher fees (active management typically means higher fees compared to passively managed funds or automated platforms like Alphathena), and less hands-on control.
In contrast, direct indexing often offers a lower-cost experience where you, the advisor, remain fully in control of the investing experience for your clients.
Together with your clients, you set the parameters, such as ESG filters, sector weights, or risk preferences, and then the technology platform does the work for you.
It’s a more modern model for RIAs who want flexibility without handing over full control to an outside manager.
Is Direct Indexing Right for Your RIA?
It comes down to how involved you want to be, and what you’re looking to optimize.
If you prefer a professional managing client portfolios so you can fully focus on business management and sales development, and you’re comfortable with the cost and minimums, an SMA could offer the strategy you want for clients.
But if you want to keep more control, reduce fees, and use technology to tailor client investments, direct indexing may be a better fit.
Either way, you have more options than ever to shape your portfolio around your values, preferences, and goals. And that’s what personalized investing is all about.
Curious About Personalizing Your Portfolio?
Alphathena’s platform makes direct indexing accessible, efficient, and tailored to you. Want to see how it works?
There are three ways to get more involved:
- Explore the platform
- Schedule a demo
- Browse the articles in our Education Center
You don’t need an outside investment manager to give your clients a portfolio that feels personal.
The right tools and a strategy that keeps you in control are all you need to meet the demand for personalization while maintaining control of client relationships and growing your business.
