A Fund of One's Own Separately managed accounts offer more control and some tax advantages, but you'll pay for those privileges
By Walter Updegrave

(MONEY Magazine) – Wouldn't it be neat if you could get the benefits of mutual funds without having to worry about market timers swooping in and out of your portfolio, siphoning off profits? And wouldn't it be even better if you could also customize your holdings to reflect your particular financial needs?

That's the latest pitch for separately managed accounts (SMAs). These vehicles are portfolios of securities handled by a money manager that you pick with the help of a broker or other adviser. As with a mutual fund, your money is invested in a diversified group of stocks or bonds, but with a major difference: Instead of being one of thousands of investors in a mutual fund, you and you alone own the securities in your managed account--and only you can put money in or take it out. In effect, you've got your own private mutual fund, which eliminates the potential for market-timing abuses and also allows you to tailor your account's holdings.

Formerly limited to investors with upwards of $1 million to invest, separately managed accounts are now available to anyone who can come up with $100,000. Some firms have even lower minimums. The gate to Smith Barney's managed accounts swings open for $50,000, while Denver-based Curian Capital requires just $25,000.

But before you consider dumping your mutual funds for the cachet of having your very own money manager, you'll want to take a closer look at how these accounts actually work and what drawbacks they may have.


Some investors are drawn to the idea of managed accounts because they think they'll get direct access to a money manager--someone whose brain they can pick for insights into the current market or specific industries or stocks. Well, you aren't likely to get face time--or even regular phone contact--with the money manager. Private managers typically run thousands, even tens of thousands, of accounts. "It's impractical to think you can call the money manager at any time," says Jack Sharry, President of the private-client group at Phoenix Investment Partners, which manages mutual funds as well as some 30,000 SMAs. If every SMA client called, he says, "the manager wouldn't have time to actually pick stocks and manage the portfolio."

That said, most companies that handle managed accounts have representatives who field questions from investors. And most SMA programs give investors access to their account holdings online, allowing them to see every security they own as well as the performance of the portfolio overall. Many firms also send weekly e-mails that detail recent buys and sells, as well as the rationale for the transactions. Mutual funds, by contrast, are required by law to disclose their holdings only twice a year and rarely disclose them more often than quarterly.


Managed accounts also offer some leeway for customization--although, at the risk of sounding Clintonesque, that depends on what you mean by customization. If you think the manager is going to handpick a unique set of securities for each investor ("Hmm, that Updegrave guy hates overpaying for growth, so I better scale back on high P/E tech stocks in his account..."), you're mistaken. In reality, the portfolio manager buys a huge slug of, say, Microsoft, and then spreads it among all the accounts.

Still, you do have the ability to exclude specific holdings from your account. So if you already own lots of tech stocks in another account, or if you work for a tech firm and much of your wealth is already riding on company stock options, you can set a filter that prevents the manager from putting Microsoft or any other stocks you designate into your account. Similarly, if you find certain industries offensive--alcohol, gambling, nuclear power, whatever--you can have shares from those industries barred from your portfolio.


When it comes to tax planning, managed accounts offer some definite advantages. Let's say you've realized a $10,000 profit on stocks you trade on your own and you'd like some losses to shelter that gain from taxes. If you have a managed account, you can have the manager harvest losses in your portfolio (assuming there are some) and eliminate some or all of your taxable gain. Similarly, if you have losses in other investments, you can direct the manager to take gains in your SMA. Mutual funds, by contrast, aren't designed to cater to individual shareholders--and are prohibited from distributing their own tax losses to shareholders.

You should not assume, however, that just because you have some control over taking losses and gains, a managed account is necessarily run to generate as few taxable gains as possible. Some mutual funds and some managed accounts are designed to limit turnover, sell high-cost-basis shares and offset gains with losses in order to keep realized taxable gains to a minimum; others aren't. If your main objective is minimizing taxable distributions, a tax-managed mutual fund can achieve that goal.


Probably the biggest drawback for investors who aren't dealing with assets in the megamillions is cost. With a managed account you pay an all-inclusive annual fee called a "wrap" that compensates the money manager who picks the securities, the sponsor firm that assembles the lineup of private managers and handles trading and administration, and the broker or other adviser who helps you choose a manager from the sponsor's lineup. The more money you invest, the lower the wrap, but for managed accounts of $100,000 or less, the price tag can run as high as 3% a year; a bit of haggling can often get that down to between 2.25% and 2.5%. Even accounts in the $250,000 to $500,000 range can have fees that hover close to 2%. That's a far cry from the average domestic-stock fund expense ratio of 1.51%, and even farther from the no-load average of 1.08%.

To be fair, the wrap includes stuff you don't get with a no-load fund, notably the services of an adviser. But you're still talking about a fairly hefty charge that you'll pay year after year.

So are managed accounts worth it? The answer depends on your situation. Here's my take: If you have upwards of $300,000 to $500,000 in taxable assets and you're likely to use the customization and tax features, a managed account could make sense, although I hardly see it as a necessity.

If you're drawn to SMAs mainly because you're worried about market timing or other fund shenanigans, I don't believe the case is compelling. There are plenty of funds that didn't open their doors to timers, and the reforms already under way at the Securities and Exchange Commission and in Congress make a repeat of these types of scandals slim. Unless your portfolio really bulks up, mutual funds are still your best bet.