Affluent investors have been pouring money into separately managed accounts and turning slightly away from mutual funds, a new consumer research report shows.

As of 2022, 22% of U.S. households that invest had SMAs, up from 13% in 2020, according to data published Thursday by Hearts & Wallets. Meanwhile, mutual fund ownership went from 38% to 39% during that time frame.

“I look at the decline of the mutual fund with sadness, but it’s getting replaced by other vehicles that are much more modern and accomplish the same things,” said Laura Varas, CEO of Hearts & Wallets.

“I’m a fan of the mutual fund as a way to get mass access to capital markets,” Varas said. “It initially was quite democratizing, in terms of bringing managed products, the expertise of portfolio managers and knowing someone was watching over your investments, to millions and billions of Americans.”

But SMAs aren’t taking the entire financial advice business by storm — the increase in ownership is rising most among households with $3 million or more to invest. For those investors, use has doubled over two years, going from 22% in 2020 to 41% in 2022, the Hearts & Wallets data show. And those investors are funneling their money into SMAs, allocating 29% of their overall portfolio to them last year, up from 22% in 2020.

“In the past, people said SMAs were sold, not bought,” Varas said. “I’m not sure that’s true anymore.”

Interest among clients has been mixed, several financial advisors said.

“Clients are perfectly happy still being in mutual funds, but I am seeing increasing interest in SMAs” as the latter “are becoming more affordable/lower cost and having lower account minimums,” Carla Adams, founder of Ametrine Wealth, said in an email.

Investors’ use of environmental, social and governance considerations has been a driver of SMAs, Adams said. Since people can disagree about what “socially responsible” is, mutual funds are not always the right fit.

“I have a client who does not want to be invested in ‘junk food companies,’ which is not a screen for ESG mutual funds,” Adams said. An SMA allows the client to choose which companies they are OK with holding, she noted.

The use of SMAs has risen along with the switch to fee-based accounts over the past two decades, said Brian Clarke, owner of Clarke Financial Counsel, who charges clients through an hourly rate. The ongoing charge can also be preferrable to the front-end charge on mutual fund A shares, which can be as high as 5%, he noted.

“An advisor might have decided to change their business model to build up a stream of recurring revenue. The SMA provides this,” Clarke said in an email.

Another advisor, Jeff Farrar, co-founder of Procyon Partners, said that ETFs are winning clients’ interest over mutual funds, while SMAs remain flat.

“But the fees and other deltas between all three investment vehicles are converging,” Farrar said in an email, noting that the firm is “agnostic between the three and use what makes the most sense for each client and their preferences.”

The new Hearts & Wallets report is based on responses from nearly 6,000 people surveyed last year, and it includes data in the firm’s existing database on consumer buying patterns for more than 70,000 households.

A separate but encouraging finding from the survey is that more people are aware of what they’re invested in, Varas said. Ten years ago, 55% of people said they knew what investment vehicles they owned, and that rate increased to 77% as of last year, she said. “The product awareness gap has almost disappeared.”

Interest in SMAs may also have had an effect on clients’ engagement, Varas said. “I think the rise in engagement with taxable accounts is related to SMAs, because SMAs are the perfect vehicle for taxable accounts.”

But something that may have helped boost SMAs was the pandemic and the need for liquidity, she noted.

“If Covid taught people anything … it’s to be prepared for a big [financial] shock,” Varas said.