Definition of a Separate Account

A separate account is a privately managed investment portfolio held by an institutional or high-net-worth investor. Unlike mutual funds, which pool multiple investors' assets, a separate account is individually tailored to meet the specific investment goals, risk tolerance, and preferences of a single client.

For example, a Canadian pension fund may use a separate account to manage assets distinct from mutual funds or exchange-traded funds (ETFs), allowing for personalized investment strategies.

Purpose of a Separate Account in Investment Management

Separate accounts are designed for:

• Customization – Allows investors to tailor asset allocation, risk exposure, and investment strategies.
• Direct Ownership – Investors own securities directly instead of holding fund shares.
• Tax Efficiency – Provides opportunities for tax-loss harvesting and personalized tax strategies.
• Greater Transparency – Investors have full visibility into portfolio holdings and transactions.
• Institutional Investment Control – Ideal for pension funds, endowments, and high-net-worth individuals seeking active management.

Types of Separate Accounts

Individually Managed Separate Accounts

• Managed by an investment advisor for a single client.
• Example: A wealthy investor hires a portfolio manager to create a custom equity portfolio.

Institutional Separate Accounts

• Used by pension funds, endowments, and corporations for specialized investment needs.
• Example: A Canadian university endowment fund manages long-term assets through a separate account.

Insurance Separate Accounts

• Maintained by insurance companies to hold policyholder investments separate from general company assets.
• Example: A life insurance company offers variable annuities that invest through separate accounts.

Hedge Fund Separate Accounts

• Used by institutional investors to access hedge fund strategies without being part of a pooled fund.
• Example: A pension fund sets up a separate account with a hedge fund manager to maintain investment flexibility.

How a Separate Account Works

Account Creation and Investment Strategy

• An investment manager works with clients to set goals, risk tolerance, and asset allocation.

Active Portfolio Management

• The portfolio is actively managed, with securities bought and sold according to client preferences.

Fee Structure

• Fees are based on assets under management (AUM), often lower than mutual fund expense ratios for large accounts.

Example: A 10-million-dollar separate account may have an annual management fee of 0.50 percent, resulting in a 50,000-dollar fee per year.

Separate Account vs. Mutual Fund

Feature	Separate Account	Mutual Fund
Ownership	Direct ownership of securities	Ownership of fund shares
Customization	Fully customizable	Standardized investment strategy
Tax Efficiency	Allows for tax optimization	Taxes are distributed among all investors
Minimum Investment	High, often millions of dollars	Low, starting from a few hundred dollars
Management Control	Investor has direct input	Managed based on fund prospectus

Example: A mutual fund investor has no control over stock selection, while a separate account investor can choose specific industries or exclude certain securities.

Advantages and Disadvantages of Separate Accounts

Advantages

• Personalized investment strategies tailored to specific needs.
• Greater tax efficiency through direct ownership of securities.
• Full transparency and control over investment decisions.

Disadvantages

• Requires high minimum investment amounts.
• Management fees may be high for smaller accounts.
• Demands active monitoring and decision-making from investors.

Related Terms

• Managed account – An investment portfolio managed on behalf of an individual investor.
• Institutional investing – Large-scale investment strategies used by pension funds and corporations.
• Separately managed account (SMA) – A type of separate account managed for high-net-worth clients.

Interesting Fact

In Canada, institutional investors and pension funds often use separate accounts to invest in alternative assets such as real estate, private equity, and infrastructure projects.

Statistic

According to the Investment Industry Regulatory Organization of Canada (IIROC), over 60 percent of high-net-worth investors in Canada use separate accounts to access customized investment management.

Frequently Asked Questions (FAQ)

1. How is a separate account different from a mutual fund?

A separate account offers customized investment strategies and direct ownership, while a mutual fund pools investments from multiple investors.

2. Who typically invests in separate accounts?

High-net-worth individuals, pension funds, endowments, and institutional investors commonly use separate accounts.

3. Are separate accounts more expensive than mutual funds?

Separate accounts often have lower expense ratios for large investments but may have higher minimum investment requirements.

4. What assets can be held in a separate account?

Separate accounts can include stocks, bonds, ETFs, hedge fund strategies, and alternative investments.

5. Can Canadian investors open separate accounts?

Yes, wealth management firms, investment advisors, and pension funds in Canada offer separate accounts to eligible investors.