Thanks to technology, there has been a lot of innovation in money management for the individual retail investor. In the past, only institutions or ultra-high-net-worth individuals had access to the nation’s top money managers and their research. Mutual funds, which have been around since the mid-20s, were designed just for this reason. To allow the small retail investor to be able to partake in a professionally managed diversified pool of stocks and/or bonds, usually with a very low initial investment, as low as $500 in many cases. When purchasing a mutual fund, you are buying into the pool and owning a share of the fund, which is managing a basket of stocks and bonds. Not only are mutual funds a very cost-effective way for the retail investor to possibly achieve diversification throughout the broader market, they are also very liquid in the fact that your shares can be redeemed or purchased directly from the fund company on a daily basis.

Exchange-traded funds, also known as ETFs, continue to gain popularity. ETFs look similar to mutual funds in that you are purchasing a bucket of stocks or bonds. However, ETFs are typically not actively managed funds. ETFs typically purchase a basket of stocks within a particular index and don’t continuously trade them. Because ETFs are not actively managed, the management expenses are extremely low, usually less than 0.25%, unlike mutual funds, which on average can charge 1% or higher for the active management plus additional sales charges on some. ETFs are also different in the way they trade. ETFs trade like individual stocks, purchasing or selling shares directly to other investors on the open or auction market.

Separately managed accounts have a few differences from mutual funds and ETFs that may be a benefit to some investors. First, the ownership. Within a managed account, you are not purchasing a piece of the pre-mixed investments, but are actually holding the individual stocks and bonds themselves. This can be beneficial both for taxation purposes and for customization. Mutual fund shares often include “embedded capital gains” — securities purchased by the fund months or years ago that have since risen in price will generate taxable capital gains when those securities are eventually sold. More recent buyers of fund shares may not receive the full benefit of the securities’ price increases, yet they pay taxes on the full capital gains. Also, if you need to harvest a specific amount of tax gain or loss in your portfolio for tax purposes, managed accounts have the option to pick which stocks to sell within your account to meet your specific goals.

A second benefit is customization and flexibility. In a separately managed account, you can have the manager put restrictions or parameters on the stocks you hold. If you are opposed to tobacco stocks, you can restrict the manager from purchasing those stocks. Managed accounts also have much more flexibility when it comes to what you can hold in the accounts. Managed accounts today can create strategies that the top endowments and institutional clients have been using for years. Another advantage is the initial investment or additions to the account may be held in cash while waiting for buying opportunities instead of forcing it immediately into a strategy. Finally, the high level of service and consultation you receive when using managed accounts is the same in which high net worth and institutional clients enjoy. Through the advancements in technology, access to separate managed accounts has become more widely available.

No specific citation is provided for the above content.