Separately managed accounts continue to grow at a much faster pace than mutual funds, Barron’s reports. In the 12 months through March 31, assets in SMAs rose 36% to $530 billion, and by 2008, they should top $1 trillion, according to Cerulli Associates.

Offering tax advantages over mutual funds is one of the primary factors driving their growth, as investors can harvest tax losses in an SMA since they hold securities in these vehicles outright. Mutual funds, on the other hand, are subject to embedded capital gains.

But there are other factors fueling SMAs’ growth. Changes in the way financial advisers approach customers is also a dynamic, and the ability to customize SMAs works well with the new fee-based, as opposed to transaction-based, model.

Many investors also like their transparency, while others swear by their superior performance to mutual funds. Citibank, which offers SMAs through a multiple discipline account, reported that this program returned 12.33% over the five years ended March 31, whereas its S&P 500 benchmark was down 1.2% during the period.

Nonetheless, separate accounts still have their detractors. Fund consultant Burton Greenwald says some investors have mistakenly gravitated to SMAs as a status symbol, and Morningstar Director of Fund Analysis Kunal Kapoor questions whether investment advisors that offer SMAs alongside mutual funds provide truly different portfolio composition in the two products. "If you are a portfolio manager who is managing a mutual fund and a separate account, and you decide to sell a stock, it’s likely you will sell it across the board," Kapoor noted.

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