How to Find the Best Managed Accounts

Some managed account structures are great, others not so much.

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A managed account (sometimes called a wrap account) is a type of investment management service that packages together a group of investments for you. Some managed accounts offer a good service for the price; others have high fees and tax inefficiencies. The challenge is figuring out which is which.

Types of Managed Accounts

An investment advisor may manage a portfolio of stocks, which is often referred to as a "separately managed account."  An investment advisor may also manage a portfolio of mutual funds; if this mutual fund management service also covers the brokerage fee costs it is called a "." 

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 investment 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 in mutual funds that the from that fund are likely to be.

Index funds charge about .10 - .35%. That means if the advisor is charging 1%, and using index funds inside the account, total fees end up being about 1.25%. That is reasonable. But if the advisor is using higher-fee funds and there is a lot of trading and trading costs, you can end up paying total fees of 2 - 3% a year. That's a lot!

Taxes in Managed Accounts

Actively managed accounts often have frequent trading that occurs inside them which means they 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.

If you have money in non-retirement accounts, or in a combination of retirement and non-retirement accounts, then 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. It is a process called "." When this is done properly, research shows it can significantly increase your after-tax returns.

Finding the Best Managed Accounts

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 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.

If you want to delegate, these guidelines will help you find the best-managed account:

  • Pay attention to total costs. Ask for an estimate of all trading costs, fund fees, and advisor fees. Make sure total fees are 2% or less a year.
  • 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 in many different types of accounts, find an advisor or managed account platform that will manage your assets across a household, not at an individual account level.
  • If you want an online solution to manage your money automatically, check out some of the . 

    Below are some additional thoughts on managed accounts in the form of a question and answer dialogue with one of my readers.

    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 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. Ideally, your money is managed at a household level - not account by account. Taking a holistic household view can help everything work together toward a common goal.

    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. If you don't have the time or expertise, I don't advise doing it yourself. Without knowing your entire household plan I don't know if their recommendations make sense, but everything you have shared sounds reasonable.