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Published: November 17, 2005 Six Solid Reasons to Stop Wasting Your Wealth in Mutual Funds
If you have $50,000 or more to invest, forget the passe (and wasteful) investment strategy known as mutual funds. Financial expert and author Don F. Wilkinson explains why separately managed accounts, or SAMs, are superior in almost every way.
You've become disillusioned with mutual funds. Perhaps you're a battle-scarred veteran of the 2000 downturn, having helplessly watched a robust portfolio dwindle to an anemic shadow of its former self. Or you've just entered the market and found that escalating fees and crushing tax bites are yielding sluggish returns (or worse, losses). Or maybe the greed and deception revealed by the 2003 scandals has left a lingering bad taste in your mouth. But if you don't put your money in mutual funds, where can you put it? Is there a viable alternative?
Yes, indeed, says wealth manager Don F. Wilkinson. If you have as little as $50,000 dollars to invest, you can now join the ranks of the super-rich and divert your dollars into separately managed accounts, or SAMs.
"It's been said that, 'Mutual funds are the roadkill of American investing,'" asserts Wilkinson, author of Stop Wasting Your Wealth in Mutual Funds: Separately Managed Accounts--The Smart Alternative (Dearborn Trade Publishing, 2005, ISBN: 1-4195-2018-0). "Eighty percent of funds yearly fail to match S&P. Don't get me wrong; I used to steer my clients toward mutual funds, too. Not too long ago, we were all happy with them. But after the disaster of 2000 I started looking around for alternatives--and that's when I discovered separate accounts."
Separately managed accounts are individual baskets of stocks or bonds (as opposed to the "pooled assets" of mutual funds) that are actively managed by independent, institutional money managers. Previously used mainly by wealthy investors because of six-figure minimum balance requirements, separately managed accounts may now be opened with as little as $50,000. In fact, according to Wilkinson, more than 37 million U.S. households could qualify to open a separately managed account.
In Stop Wasting Your Wealth, Wilkinson provides:
Point-by-point comparisons of SAMs to mutual funds, outlining risks, benefits, and returns
A user-friendly process for opening, customizing, and switching to a separate account
Ways to find advisors who handle separate accounts for clients
So what exactly are the benefits of pulling your money out of mutual funds and plowing it into SAMs? Wilkinson offers six off the top of his head:
You'll probably see a higher ROI. Of course, the market is the market, and there are never any guarantees. But Wilkinson insists that separately managed accounts have the capability to significantly outperform mutual funds. "Mutual funds are less efficient because each fund is forced to carry high reserves anticipating redemptions from other nervous investors," he explains. "The fund manager, therefore, has to juggle buying when the market is high and redeeming when the market is declining. This affects all investors in the fund and performance suffers. With the freedom from maintaining cash reserves and predictable flows from other investors not an issue, separate accounts have better potential for achieving better returns than mutual funds. This is especially true when separate accounts utilize the expertise of top grade money managers covering the progress of the portfolio."
You'll wrest more of your money away from Uncle Sam. Not only did the average fund experience performance losses in recent years, but investors got hit with taxes on capital gains--especially if they purchased a fund late in the year. In other words, a November buyer has to pay taxes on the same capital gains as investors who purchased in January. A separate accounts manager, on the other hand, can do "tax harvesting," offsetting gains with losses to deliver a higher after-tax return than mutual funds. Since mutual funds usually record short-term capital gains, fund investors in the 39.6 percent federal tax bracket have to yield a gross of 16.56 percent to net 10 percent. SAM investors have to gross only 12.5 percent to net the same 10 percent.
You'll say goodbye to hidden fees. When you invest in mutual funds, your expenses include loads, redemption fees, 12b-1 marketing fees, trading commissions, and soft dollars--all of which drive your fund expenses higher than is disclosed. With a SAM, you pay a flat yearly fee, usually between 1.5 percent and 3 percent of assets. "Separate account fees are based on a sliding scale," explains Wilkinson. "The more money you initially put in the pot, the lower the fee percentage. With mutual funds, the annual expenses remain constant no matter how much cash you invest. In any event, the separate account offers a much clearer, less deceptive form of fee structure."
Do the math. Multiple managers watching 50 or fewer securities is a much safer prospect than one manager watching 150 stocks. Separate accounts mean there are more people guarding the hen house. "With mutual funds, a single manager is responsible for watching hundreds of stocks," says Wilkinson. "It is not humanly possible to do this and do it well. With separate accounts, managers are responsible for watching, say, 30-50 securities. In addition, each investor owns the securities in his or her account. This makes it easier to perform a re-balancing of specific securities to match market conditions. With mutual funds, this cannot happen."
You can customize your own portfolio. "You may choose not to include any security in your portfolio for any number of economic or social reasons," says Wilkinson. "For example, if you work at IBM, you might not want any of your own company stock included in your portfolio because you already have stock options with the company. You have the right to impose your values on your portfolio. If you say no to tobacco stocks, your money manager can eliminate tobacco companies from your basket of securities. In short, you may include or exclude securities based on your ethical, economic, or political views. This is usually not possible with a mutual fund."
Let's face it: personalized attention is just better. "Call it 'the prestige factor,' if you like," says Wilkinson. "I prefer to simply call it smart investing. You can't deny that having private money managers servicing your separate account is superior to casting your lot in with the masses and being viewed as a commodity. The knowledge that your portfolio is being managed by a private money manager alongside a Ford Foundation or a Bill Gates is a benefit that is hard to ignore."
So if separate accounts are so much better than mutual funds, why do so many financial advisors continue to push the latter? That's a good question, says Wilkinson. There could be many answers: laziness, fear of change, or ignorance of how SAMs work. Regardless, your first step in making the transition to SAMs is to ask your advisor about them.
"Don't be shy," urges Wilkinson. "Speak up. Just educate yourself first so that you can discuss the subject with confidence. Any financial advisor worth his or her salt will listen to your concerns about mutual funds and address them. And if he or she brushes off the whole subject of separate accounts, it may be time for a divorce. Quite simply, this is one of the most important asset management developments in a generation--don't trust your financial destiny to anything less."
Are You a Candidate for a Separate Account?
Excerpted from Stop Wasting Your Wealth in Mutual Funds:
Separately Managed Accounts--The Smart Alternative
(Dearborn Trade Publishing, December 2005, ISBN: 1-4195-2018-0)
by Don F. Wilkinson
Do you have more than $100,000 in investable assets? Separate accounts are especially appropriate for portfolios (including IRAs) above $100,000. But initial asset investments are dropping rapidly. Today, an investor can have a separate account for as little as $50,000, with much the same services as larger accounts.
Did you receive a tax bill from Uncle Sam for more than $10,000 during a recent tax year? Separate accounts can be managed for tax efficiency. Additionally, taxes are incurred only on your investment gains, not other investors in the pool.
Are you aware of the total fees and commissions you pay for a percentage of your assets in a mutual fund? If not, better establish a separate account. Separate accounts are asset-based, rather than commission-based, giving your money manager special incentive to grow your assets. In addition, because fees are based on a percentage of your total assets, you can calculate at any time what your fees will be. Nothing is hidden the way fees are in mutual funds.
Are you receiving personalized counsel that helps match your assets to your goals and risk tolerance? Separate accounts provide a customized asset management strategy, developed by your independent advisor, based on your specific long-term goals.
Do you expect to receive a significant wealth transfer or pension rollover? If so, separate accounts can provide personalized portfolio allocation of significant asset pools, taking into consideration tax consequences, immediate and long-term financial needs, etc.
Are you interested in exploring other asset management approaches besides mutual funds? Separate accounts enable you to invest in a range of discreet investment vehicles beyond mutual funds, while maintaining a diversified portfolio.
Don F. Wilkinson, a 30-year veteran of the financial services industry, owns and operates a successful wealth management firm based in Newport Beach, California. His company oversees and consults on more than $500 million in separate accounts and handles estate planning for affluent individuals and their clients. Sought by broadcast and print media for his viewpoints, he has been featured on regional radio shows, has hosted his own radio show, Financial Strategies, and is frequently quoted by the Los Angeles Times and the Orange County Register.
Stop Wasting Your Wealth in Mutual Funds: Separately Managed Accounts--The Smart Alternative (Dearborn Trade Publishing, 2005, ISBN: 1-4195-2018-0) is available at neighborhood and online booksellers or by calling (800) 245-2665. Dearborn Trade Publishing is the nation's premier trainer and information provider for business and financial leaders committed to profiting from breakthrough ideas.
For more information, visit wastingwealth.com.
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