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What is a Separate Account?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 18 December 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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Separate accounts are accounts that are maintained outside the scope of the general account, usually for purposes of purchasing assets as investments. This model is often made available by insurance companies to their clients, who are allowed to participate in a pooled investment that is managed by the insurance provider. A separate account is often opened with an investment advisor or brokerage, and makes use of the pooled resources to create a manageable and profitable account for the client. Since the account is for the benefit of the client, the proceeds invested and generated by the account are segregated from the general accounts of the insurance company.

One of the benefits of the separate account is that the investor is allowed to make choices regarding his or her investment strategy by choosing from the categories offered by the insurance company. This means the investor who is somewhat conservative in money matters can opt to be included in an investment pool that involves investments that are stable and provide a small but consistent return. Investors who are willing to assume a greater degree of risk may choose a category that has the potential to generate a higher return due to the increased rate of volatility.

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While a separate account functions in much the same way that a mutual fund operates, there are a couple of core differences. First, most funds of this type will require a larger minimum investment than is necessary to participate in a mutual fund. The second distinction has to do with ownership; with a separate account, the investor does not own a portion of the overall pool of securities but instead, owns the securities directly.

The separate account may be structured as either a managed or non-managed account. Managed accounts provide for proactive and aggressive management as part of the process of earning the highest return possible. Non-managed accounts are operated with a more passive approach, and are evaluated on a less frequent basis. One type is not necessarily superior to the other, since the value of both depends a great deal on the overall financial goals of the investor and the desired outcome, as far as return is concerned.

There is sometimes confusion between the separate account and a similar investment strategy that is known as a separately managed account. While there are a number of similarities, a separately managed account or SMA is privately managed through a broker rather than offered through the auspices of an insurance company that participates in the management of the account. Both approaches are capable of generating a significant return if managed properly, and are worthy of consideration by investors who want professional support in their investment endeavors

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