Managed accounts (SMA) for traders, explained
A separately managed account (SMA) lets you trade a client's own brokerage account under a limited power of attorney. The client keeps ownership and custody of their money; you only get authority to place trades. That makes the SMA the lightest way to manage outside capital: no pooled fund, no offering documents, no co-mingling of assets.
How an SMA and an LPOA actually work
An SMA is not a product you build. It is just a normal brokerage account that belongs to your client, with you added as the trading agent. The mechanics are simple:
- The client opens the account in their own name at a broker and funds it with their own money.
- They sign a limited power of attorney (LPOA) that grants you authority to trade, but usually not to withdraw funds to yourself. Withdrawals go back to the account holder.
- You trade the account alongside your own, often using a master-and-mirror setup so every client gets the same fills as your book.
- The client can watch in real time and revoke the LPOA whenever they want. They never lose control of their own brokerage login.
Because the client holds the assets directly, there is nothing for you to custody. You are an agent, not a fund. That single fact is what removes most of the legal and operational weight that a fund carries.
SMA versus a pooled fund
The difference between an SMA and a pooled fund is real, and it matters to the kind of clients you can take.
| Managed account (SMA) | Pooled fund | |
|---|---|---|
| Who owns the money | The client, in their own account | The fund entity |
| Custody | Client's broker holds it | Fund administrator and prime broker |
| Co-mingling | None, one account per client | All investors pooled together |
| Transparency | Client sees every trade live | Reported periodically (monthly or quarterly) |
| Setup cost | Near zero | $30k-$100k plus ongoing admin and audit |
| Withdrawal | Client controls their own account | Subject to lock-ups and redemption windows |
The trade-off: an SMA is clean and cheap, but it does not scale the way a fund does. Each client is a separate account you have to manage and reconcile. A handful is easy. Fifty is an operations job. Pooling assets in a fund exists precisely to solve that scale problem, at the cost of real money and real compliance.
Fees and profit-split norms
There is no fund administrator setting your terms, so SMA fees are negotiated directly. Common structures:
- Performance-only. A share of new profits, typically 20-30%, charged on a high-water-mark basis so you only earn on gains above the prior peak. This is the most common arrangement with individual clients because it aligns you with their account.
- Management plus performance. A small annual management fee (often 1-2% of assets) on top of a performance share. More common once accounts get larger.
- High-water mark. Whatever the split, a high-water mark protects the client: if the account draws down, you earn nothing on the recovery until it is back above its previous high. Offer this by default. It is the norm and it builds trust.
Fees are usually calculated and debited from the client's account by the broker or a third-party calculator, not handled by you. Keep it transparent and documented.
The licensing you still have to check
This is the part most traders skip, and it is the part that gets people in trouble. An SMA is lighter than a fund, but "lighter" is not "unregulated."
In the United States, managing money for others for compensation can make you an investment adviser, which often means a Series 65 or registration at the state or SEC level, even without a fund. The thresholds and exemptions vary by state, by number of clients, and by what you trade (spot forex and futures sit under different regulators than securities). Outside the US, every jurisdiction has its own regime.
The honest answer: check before you take a single dollar. Read the licence to manage money for what actually applies to your situation, and look at PAMM accounts if you want a broker-administered version of the same idea that handles allocation and fee splits for you.
Where the SMA sits on the ladder
A managed account is rung one. It is the right place to start because it lets you manage real outside money with almost no fixed cost while you build the thing that actually matters: a verified track record.
- Managed account / PAMM. Trade a client's own account under an LPOA. Cheap, transparent, and a real way to start earning a performance share.
- Incubator fund. A low-cost vehicle to build an audited, verifiable track record over 6-12 months, the stepping stone to a real launch without the full cost.
- Get seeded or allocated. A seeder, first-loss desk, or emerging-manager program puts capital behind a verified record in exchange for a share of the upside.
The SMA is honest work and a fine way to manage a few accounts. But it is hard to scale and it rarely puts institutional capital behind you on its own. If your goal is to manage real size, the realistic path is to use the SMA to build a record, then move toward allocation. The hedge fund alternative walks through that route for a profitable trader who does not want to spend six figures launching a fund.
Start with a managed account if you can. But treat the track record it produces as the real asset, because that is what an allocator will actually pay for.