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The Scoop on Managed Accounts

How to Find the Best Managed Accounts

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A managed account or wrap account is a type of investment management service that takes many forms. Finding the best managed account for your needs can take a bit of research.

Types of Managed Accounts

An investment advisor may manage a portfolio of stocks, which is often referred to as a separately managed account, or a portfolio of mutual funds which is often referred to as a wrap account. A financial advisor may recommend you invest your money in both separately managed accounts and wrap accounts, in which case you may be paying several layers of fees.

Fees in Managed Accounts

Layers of fees can make the wrong type of managed account excessively expensive; remember the higher fees the lower the returns for you. Investment management is not a service where paying more delivers higher returns. As a matter of fact, it has been proven that the more you pay, the lower your returns are likely to be.

Actively managed accounts are not very tax-efficient, so for non-retirement money they may not be the best solution. Accounts that turnover your account, or make frequent changes to your portfolio, incur higher transaction fees and result in a higher tax bill for you. This reduces your net investment return (your return after taxes and fees.) Net returns are what matters.

Learn more: 6 Investment Fees to Ask About

One About.com MoneyOver55 reader emailed me a question about managed accounts. Below is our dialogue.

Q. What are your thoughts on wrap/managed money accounts?

A. It depends on what they are wrapping and what type of model they follow. Are they wrapping no load index funds and charging 1% or less? That is reasonable. Or are they wrapping a managed account around actively managed mutual funds or stock managers with total fees in the 2-3% range? Are they managing across a household placing investments in accounts in a tax efficient way, or managing each account as its own separate entity? There are about as many ways to offer wrap/managed money accounts as there are mutual funds, so it is difficult to provide more than a generic answer.

Q. Thank you so very much for getting back with me, so appreciative !! Hard to trust someone completely when they have a monetary interest in the game. I want to rollover a 401-K into an IRA. The fee is 1.25% on assets and they are wanting me to go with managed portfolios that they can specifically tailor for me with Morningstar or Curion. I did ask about mutual funds and they said they would go that route if I preferred. Not sure what to do - considered Vanguard & doing no-load mutual funds on my own, not sure if I have time or expertise, but don't want to lose money to loads & high fees. What are your thoughts ??

A. Well, depending on how much money you are talking about 1% - 1.25% is pretty standard. You can also find online services that will build portfolios for less, sometimes around .50% or even lower. Many fee-only financial advisors charge about 1%, use index funds, and may provide additional planning advice along with investment management services.

Learn more: Financial Planning vs Investment Advice vs Retirement Planning – Which Do You Need?

Keep in mind underlying index funds charge about .10 - .35%. So total fees if the advisor is charging 1%, and using index funds inside the account, end up being about 1.25%. Kind of like doing your taxes, you can do it yourself, or pay someone to do it for you. What you are paying for is someone who will build an appropriate allocation, choose low cost funds to fill in that allocation, monitor it and rebalance when needed, and report on the results so that you know your percentage return each year. You need to decide if you are a do-it-yourself person or if you prefer to delegate. Professionals tend to follow a more disciplined process - so that in itself can lead to better results, but if you were able to follow that disciplined process on your own, then you would achieve the same results. Hiring someone does not mean they will achieve higher returns than you would on your own. It means you are hiring them to follow a disciplined and consistent investment process and build an appropriate portfolio for you.

What about tax management?

One of the questions not addressed above is whether a managed account process is tax efficient. If you have money in non-retirement accounts, or in a combination of retirement and non-retirement accounts, than what you need to pay attention to is after-tax returns. A good investment advisor can place tax-efficient investments in your non-retirement accounts and tax inefficient investments in your retirement accounts. When this is done properly, research shows it can significantly increase your after-tax returns.

Learn more in Want to Increase Your Retirement Income by 30% or More?

Finding the Best Managed Accounts

These guidelines will help you find the best managed account:

  • Look for low fees. Pay investment advisor fees of 1% or less.
  • Use managed accounts that use no load index funds. This keeps costs down.
  • If you have money in after-tax accounts as well as retirement accounts, find advisors who manage for after-tax returns.
  • If you have money across many different accounts, find an advisor or managed account platform that will manage your assets across a household, not at an individual account level.

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