Benefits of Separately Managed Accounts for High-Income Families

By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.

The main benefits of a separately managed account (SMA) are that you own each stock directly instead of a share of a pooled fund, you can harvest losses on individual positions to offset gains elsewhere, and you can exclude specific holdings, such as your employer’s stock. You never inherit another investor’s capital gains, which can happen inside a mutual fund. The trade-offs are higher minimums, an extra layer of fees, and more paperwork than a simple index fund.

For a California or Washington household earning $750,000 to $3 million, with a large taxable brokerage account and a steady stream of RSUs, those benefits are real. For a family whose savings sit mostly in 401(k)s and 529s, they mostly are not, because tax-advantaged accounts get little from tax-loss harvesting.

What a separately managed account is

An SMA is a brokerage account in your name that a professional manager runs to a set strategy. The manager buys and sells individual securities on your behalf. You see every holding and every trade on your statement, and each position has its own cost basis.

A mutual fund or ETF works differently. You own shares of the fund, and the fund owns the stocks. You cannot sell one losing stock inside the fund, you cannot remove a company you do not want, and with mutual funds you can receive taxable capital gain distributions when the fund sells holdings, even in a year your own shares lost value. The SEC’s Investor.gov page on mutual funds explains how a fund distributes its net capital gains to investors.

A common version for families like yours is “direct indexing”: the SMA holds most of the stocks in a broad index such as the S&P 500 or a total-market index, so it tracks the index closely, but you own the stocks one by one. Large asset managers offer tax-managed SMA and direct indexing programs, usually through a registered investment adviser rather than directly to individuals.

Four benefits that matter for a high-income W-2 family

1. Tax-loss harvesting on individual stocks

Even in a year the index rises, some of its stocks fall. An SMA manager can sell the losers, book the loss, and buy a similar but not substantially identical stock to keep the portfolio on track. Those losses offset capital gains you realize elsewhere, including gains from selling vested RSU or ESPP shares. If losses exceed gains, up to $3,000 a year ($1,500 married filing separately) can offset ordinary income on your federal return, and the rest carries forward to later years (IRS Topic 409).

2. Diversifying away from employer stock

If you work at Apple, Amazon, Genentech or Gilead, a large share of your net worth may already be in one company through RSUs, ESPP shares and unvested grants. An SMA can exclude your employer, or its whole sector, so new money does not add to the concentration. Harvested losses can then be used to offset the gains when you sell older, appreciated company shares in stages.

3. Your own cost basis, not the fund’s

Because you own each lot, you start fresh. You do not buy into gains that built up inside a fund before you arrived, and you decide when gains are realized. You can also often transfer existing stock positions into an SMA in kind, so the manager diversifies around them over time rather than selling everything at once.

4. Values and preference screens

You can remove industries or companies you do not want to own. For some families this is about values. For most of our families it is practical: excluding the sector where both parents already work.

Worked example: a $1.2 million California household

Assumptions (illustrative, not a forecast): a married couple filing jointly in the Bay Area, $1.2 million of W-2 income, two children ages 4 and 7. They hold $1.5 million in a taxable direct indexing SMA and $600,000 of appreciated employer shares from RSUs that vested years ago. In a volatile year, the SMA manager harvests $120,000 of losses while the account as a whole stays close to the index.

The couple uses those losses to sell $120,000 of long-term gains in employer stock with no net gain to report. Here is what that gain would otherwise have cost:

California has no lower rate for capital gains, so the gain is taxed at the same state rate as salary (FTB). That is why harvested losses are worth more to a California family than to a family in a state without an income tax.

Two honest caveats. First, this is mostly deferral, not forgiveness. The replacement stocks have a lower cost basis, so more gain is due when they are eventually sold, unless the shares are held until death and receive a step-up in basis, or are given to charity. Second, harvesting opportunities shrink over time. After several years of rising markets, most lots in the account sit at a gain and there is little left to harvest unless you keep adding new cash.

How it plays out in Washington

Washington has no wage income tax in 2026, so a Washington family does not get the state benefit on ordinary income. But Washington does tax long-term capital gains on stocks: 7% on taxable gains up to $1 million and 9.9% above that, after a standard deduction that was $278,000 for 2025 (WA DOR; the 2026 amount was not yet published when we checked). An Amazon or Microsoft family selling a large block of old company stock can cross that threshold in one year, and harvested losses help keep realized gains under it. Washington has also enacted a 9.9% income tax on AGI over $1 million starting in 2028 (WA DOR), which may change this math for the highest earners.

The costs and trade-offs

• Fees. An SMA manager charges a fee on top of any adviser fee, while many broad index ETFs charge very low annual expenses. As a hypothetical, a 0.30% manager fee on $1.5 million is $4,500 a year. Compare that to the realistic tax value of harvesting for your situation, not to the best year.
• Minimums. Managers set minimum account sizes, which vary by strategy. Direct indexing has brought minimums down, but a meaningful tax benefit usually needs a meaningful taxable balance.
• Wash sale rules across all your accounts. A loss is disallowed if you buy substantially identical stock within 30 days before or after the sale (IRS Publication 550). That includes purchases by your spouse and purchases in your IRA or Roth IRA. An SMA manager sees only the SMA, so someone has to coordinate across the household.
• Complexity. Hundreds of positions mean long 1099-B forms and a portfolio that is harder to unwind or move to another manager later.
• Wrong account type. Inside a 401(k), IRA or 529, there are no capital gains to offset, so most of the SMA’s tax benefit disappears.

Decision checklist: is an SMA worth it for your family?

1. Do you have, or expect to have, a taxable brokerage balance large enough to meet manager minimums after your emergency fund and near-term cash needs?
2. Do you realize meaningful capital gains most years, for example from selling RSU, ESPP or older company shares?
3. Is a large part of your net worth in one employer or one sector that you want to exclude?
4. Are you in California, or in Washington with gains likely to exceed the capital gains standard deduction?
5. Will someone coordinate wash sales across both spouses’ accounts and retirement plans?

If you answered yes to the first two, an SMA is worth a serious look. If you answered no to the first, a low-cost index fund in your taxable account is usually the simpler answer, and your next dollar may do more in a mega backdoor Roth or a 529.

Common mistakes

• Putting an SMA inside an IRA or 401(k) and paying for tax management that has nothing to manage.
• Repurchasing the same stock in a spouse’s account or an IRA within 30 days of a harvested loss.
• Treating harvested losses as tax saved for good, then being surprised by larger gains years later.
• Running an SMA that excludes your employer while continuing to hold every vested RSU, so the concentration never actually falls.

What to write down for your kids

An SMA comes with an investment policy statement: what the account is for, what it excludes and why, and when gains will be taken. That document is worth keeping in plain language, as part of your family governance records. Note why you excluded your employer, how you decided how fast to sell company stock, and what you were trying to protect. As Kevin Luu puts it, “Your kids don’t need to inherit your portfolio. They need to inherit your decision-making process.”

Frequently asked questions

Is an SMA the same as direct indexing?

Direct indexing is one kind of SMA. An SMA is any professionally managed account where you own the securities directly. Some SMAs follow an active stock-picking or bond strategy. Direct indexing SMAs aim to track an index while harvesting losses on individual stocks, which is the version most often used by high-income families with large taxable accounts.

Can I move my existing stocks into an SMA?

Often, yes. Many managers accept in-kind transfers of existing shares, including vested RSU shares, and build the rest of the portfolio around them. They can then sell the concentrated or appreciated positions gradually, using harvested losses to offset the gains, instead of selling everything at once and paying a large tax bill in one year.

Do SMAs help with taxes in a 529 or retirement account?

Very little. Growth in 401(k)s, IRAs and 529s is already tax-deferred or tax-free, so there are no capital gains to offset with harvested losses. The tax benefits of an SMA apply to taxable brokerage accounts. Exclusions and direct ownership still work in other accounts, but you would be paying for tax management you cannot use.

Next step

Pull your last two years of 1099-B forms and add up the capital gains you realized, including sales of RSU and ESPP shares. That number, plus your taxable account balance, tells you whether an SMA is worth comparing against a plain index fund. Our investment and risk management and tax management pages explain how we handle this for families, and the related guide on taxes on a brokerage account you don’t sell covers the basics. If you want a second opinion, our Tax & Wealth Assessment is available. This is general education, and the right move depends on your family’s full picture.

Written by

Kevin Luu

Co-Founder and Chief Learning Officer, Bright Advisers

Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.

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