Separately Managed Accounts - What They Won't Tell You

One of the difficulties inherent in making apples-to-apples comparisons among investment offerings is that fee structures vary. This is even trickier for Separately Managed Accounts (SMAs) than for mutual funds, for a variety of reasons.

Fees are not straightforward
Mutual fund fees are fairly straightforward. The key number for a mutual fund is the net expense ratio, which includes the management fee, miscellaneous expenses and usually a distribution charge, and many funds also have different types of sales charges. For mutual funds, investors can easily obtain information about the fees and charges by looking at prospectuses from the fund company either online or through the mail.

But SMAs do not come with prospectuses. Instead, basic fee structures for SMAs need to be researched in a regulatory filing called a “Form ADV Part 2.” Unlike prospectuses for mutual funds, ADVs aren’t as easy to find online – but you can get this document by contacting the manager directly. Here’s the catch: even after you’ve gone through the trouble of finding the ADV, the published fee schedule in the ADV Part 2 is not necessarily firm - it is subject to negotiation between the investor (or the investor's financial advisor) and the money manager. And in practice it’s often not a single fee, but a sliding scale in which the fee (which is expressed as a percentage of assets under management) decreases as the asset volume (the amount invested) increases.

The SMA fee is actually a consolidated fee that may cost you more or less than what you would pay if you purchased the services included in the SMA program separately. In fact, these accounts used to be call “wrap accounts” because they consolidated (or “wrapped”) all the fees into one big fee. For example, one of the fees that’s included are trading fees. If the portfolio manager is trading a lot, then great, you benefit! But if he’s hardly trading you may be overpaying for this service.

If your account is big enough, you may contract with the money manager directly, bypassing the brokerage firm altogether. This reduces your fees because you’re cutting out the middle man.

Finally, since most money managers offer SMAs through several brokerages, you may be able to get a better fee at another brokerage. Do your homework, these accounts are not exclusive to the big brokerages like Merrill Lynch, Smith Barney or Morgan Stanley.

The happy news doesn’t stop here. Stay tuned for more.