How to Find the Best Managed Accounts

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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, while others have high fees and tax inefficiencies. The challenge is in figuring out which are which.

Key Takeaways

  • You should aim to limit total fees, including the manager's fees, trading costs, and fund fees, to no more than 2%.
  • Unless you are investing all of your money in tax-deferred retirement accounts, you should find a manager who specializes in after-tax performance.
  • Robo-advisors provide a low-cost way to automatically balance your portfolio based on broad goals.

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 "wrap account." 

A financial advisor may recommend that 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

Layers of fees can make the wrong type of managed account excessively expensive. Remember: the higher fees, the lower your returns. Investment management is not a service where paying more delivers higher returns. It has been proven that the higher the mutual fund fees, the lower the fund returns are likely to be.

Index funds charge about 0.15%, so if the advisor is charging 1% and using index funds inside the account, total fees end up being about 1.15%. 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% to 3% a year. That's a lot!

Taxes

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. These increased fees reduce your net investment return—your return after taxes and fees. Net returns are what matters.

If you have money in non-retirement accounts, or a combination of retirement and non-retirement accounts, then what you need to pay attention to is your after-tax return. A good investment advisor can place tax-efficient investments in your non-retirement accounts and tax-inefficient investments in your retirement accounts in a process called "asset location." Research shows that when this is done properly, it can significantly increase your after-tax return.

How to Find the Best Managed Accounts

As with 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, rebalance when needed, and report on the results so that you know your percentage return each year. 

You need to decide whether you are a do-it-yourself person or prefer to delegate. Professionals tend to follow a more disciplined process, which can lead to better results. However, if you were able to follow that disciplined process on your own, then you could 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 that total fees are 2% or less per 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 top robo-advisors

The Balance does not provide tax, investment, or financial services or advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.