While many direct indexing strategies aim to deliver similar outcomes—tax management, customization, and market exposure replication—the structure behind the implementation can materially affect how those outcomes are delivered in practice.
For advisors, the challenge is often balancing several competing priorities at once:
- Delivering personalized portfolios at scale
- Managing taxes efficiently
- Coordinating across multiple accounts and asset types
- Accommodating legacy holdings or concentrated positions
- Matching implementation complexity to account size and client needs
Two commonly used approaches—manager-traded SMAs and model-delivered SMAs within a UMA—can both support these goals. However, they differ in how portfolios are implemented, monitored, coordinated, and scaled over time.
Understanding these differences can help advisors determine which structure may be better suited for a particular client relationship.
Strategies for SMA management
At a high level, both approaches share the same objective: building a portfolio aligned with the client’s broader financial picture.
The advisor works with the client to define factors such as:
- Target market exposure
- Tax sensitivity
- Risk preferences
- Existing holdings
- Customization requirements
- The role the portfolio plays within the client’s overall balance sheet
From there, a key difference becomes who is responsible for implementation and ongoing portfolio management.
Similar to the range of available mutual funds and ETFs, there are multiple ways to implement separately managed accounts (SMAs). One important distinction is between manager-traded and model-delivered approaches. This distinction influences not only portfolio construction but also trading responsibility, tax management coordination, operational workflow, and the advisor experience.
Manager-traded SMA (standalone direct indexing)
- The investment manager is responsible for both constructing the model and implementing it in client accounts
- This includes trading, tax management, and portfolio customization at the individual account level
- The manager maintains discretion over ongoing investment decisions and typically provides reporting and client servicing
For example, an advisor selecting a strategy from Fidelity Investments may be using a structure in which the same firm designs the portfolio, executes trades, and applies tax management on a per-account basis.
Model-delivered SMA (within a UMA)
- The investment manager provides the target model portfolio on an ongoing basis
- The managed account platform is responsible for implementation, including trading, tax management, and customization
- Portfolio management may incorporate additional coordination across accounts through overlay services
In this structure, UMA platforms such as Envestnet facilitate execution and tax overlay within a unified managed account, while the model provider continues to supply the underlying strategy.
Considerations for direct indexing with SMAs vs. tax overlay within a UMA
For many advisors, the decision between UMAs vs SMAs is less about which approach is “better” and more about which structure best fits the client's operational and portfolio-management needs. Several variables may influence that decision.
1. Account size and accessibility
One practical consideration is minimum account size.
- Standalone SMAs often have higher investment minimums (commonly around $250k)
- UMA-based approaches may offer lower entry points (often around $50k)
This can affect which clients are able to access direct indexing capabilities.
2. Funding complexity
The composition of the funded account may also influence implementation efficiency.
- Portfolios funded with concentrated stock positions or appreciated securities may benefit from more flexible account-level tax management
- Portfolios funded primarily with cash, mutual funds, or diversified holdings may integrate more easily into a UMA structure
The underlying question is often: How much customization and transition management does the account require?
3. Tax management approach
Both structures can support tax management, but the coordination process may differ.
- Manager-traded SMAs generally apply tax strategies at the individual account level
- UMA structures may incorporate tax overlay capabilities across multiple accounts or sleeves
For households with multiple managed relationships, broader coordination may become increasingly important.
4. Portfolio context
Another consideration is whether the account is being managed independently or as part of a larger portfolio ecosystem.
- In multi-account relationships, coordination across holdings, exposures, and tax decisions may be valuable
- In more self-contained accounts, a standalone implementation may be sufficient
In many cases, the decision is less about portfolio construction and more about how the portfolio fits into the client’s overall financial architecture.
Both approaches can support customization at multiple levels, including:
- Individual security restrictions
- Sector or industry tilts
- ESG or values-based preferences
- Retention of legacy holdings
For example, if a client wants to retain a concentrated legacy stock position, either structure can generally accommodate that preference through portfolio-level adjustments.
Questions to help your client choose
Rather than viewing one approach as universally preferable, advisors may find it more useful to evaluate implementation structure through the lens of the client’s broader needs.
Questions that may help guide the conversation include:
- How large and complex is the portfolio?
- How important is household-level tax coordination?
- Does the client have legacy positions or funding constraints?
- Is the portfolio being managed independently or alongside multiple accounts?
- How much operational flexibility and customization is required?
In many cases, both approaches can be appropriate depending on how these factors come together.
As direct indexing continues to evolve, advisors increasingly have greater flexibility in delivering personalized portfolio management. A key challenge is no longer simply whether to use direct indexing, but how to implement it in a way that best aligns with each client relationship.
Meet your clients’ demand for personalization, speed, convenience, and transparency with direct indexing and UMAs.
