How to Find the Best Managed Accounts
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 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 "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 investment fees.
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. It has been proven in mutual funds that the higher the mutual fund fees, the lower the fund returns are likely to be.
Index funds charge about 0.10 to 0.35%. 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 to 3% a year. That's a lot!
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 increased fee 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 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 "asset location." When this is done properly, research shows it can significantly increase your after-tax returns.
How to Find 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, 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. However, 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 top robo-advisors.
The Balance does not provide tax, investment, or financial services and 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.