Why mutual funds?

• Can work with any size portfolio
• Offer professional portfolio management to the average investor
• Great for investors accumulating wealth in retirement accounts

How are SMAs and Mutual Funds similar?

There are two main similarities:

• Both offer diversification
• Both offer access to a professional portfolio manager

Advantages of Separately Managed Accounts

Tax Liability Control

With regard to mutual funds, investors are basically shareholders, and they have no control over the taxation of their funds. This can create huge capital gain problems for investors as all gains must be distributed, while losses cannot.

As an example, let’s look at a mutual fund that has been around for 10 years. If an investor bought shares in the fund last year and the fund sold stock this year that it had held that entire duration, that investor could be subject to taxes on large embedded capital gains even though the investor did not own the fund when the shares were purchased.

In the case of a separate account, an investor holds stock in their names. Separate account managers perform “tax harvesting,” which means they offset gains with losses in order to deliver a higher after-tax return.

Customization and Asset Control

A shareholder in a mutual fund generally has no idea what securities are held. Their investment is pooled with other investors within the fund, and the shareholder has no say in the fund’s holdings.

In the case of a separate account, each individual investor has a portfolio customized to meet their investment goals and objectives. A professional money manager buys and sells securities, creating a portfolio of specific assets, according to an individual’s risk profile. The investor does have a say in what securities they own.

Expenses/Cost

Low fees are vitally important to an investor’s bottom line. High fees can adversely affect long-term performance, and many mutual fund shareholders do not recognize the high costs involved with mutual funds.

In the average mutual fund, the expense ratio averages 1.6 percent per year; sales charge, 0.5 percent; turnover-generated portfolio transaction costs, 0.7 percent; and opportunity costs – when funds hold cash rather than remain fully invested in stock – 0.3 percent. The average mutual fund investor loses 3.1% of his investment returns to these costs annually.*

The Choice is Yours

Mutual funds are a great way to safely diversify your funds while growing them, especially in retirement plans.

Separate accounts offer advantages when it comes to tax considerations, customization and expenses. They offer the opportunity to create a portfolio of specific assets.

*Rutner, Richard. The Trouble with Mutual Funds. 2nd ed. Elton Wolfe Publishing, 2002. 58.