Investment vehicle offers customized portfolio

Until recently, only the uberelite were given keys to an investment vehicle known as a separately managed account. With these, the superwealthy essentially had customized securities accounts maintained under the careful eye of a trained professional.

But in the past few years, more and more investment firms have begun offering separately managed accounts to clients with fewer assets. The result has been a surge in the popularity of these accounts among everyday investors like physicians.

"More and more, separately managed accounts are becoming today what mutual funds were 10 years ago," said Sean Clark, chief investment officer of Clark Capital Management Group Inc., a Philadelphia-based wealth management firm. "They're in people's vocabularies, and most investors have enough assets to get into a managed account program."

The numbers paint a dramatic picture: Assets under management in such accounts grew by 15.9% in 2004 to reach $576 billion, according to the Money Management Institute, a trade organization. By 2008, the institute projects the accounts will hold $1.3 trillion in assets.

The accounts are touted for their transparency, tax efficiency, customization and costs. But skeptics remain unconvinced that separately managed accounts offer much in the way of savings or other advantages over similar investment vehicles like mutual funds or exchange-traded funds, which are like a hybrid of a mutual fund and a stock.

Still, they have unique properties that might attract some folks. They essentially function as an individual investment account, managed by a professional and customized to fit the investor's needs or objectives. The manager may choose most of the stocks and bonds held in the account, but does so in a way that aligns with the investor's wishes and strategy.

That kind of customization is different than what investors typically find with other managed investments like mutual funds, where managers decide which securities are being bought and sold based on the fund's needs rather than trying to meet an individual's goals.

Customization might also bring with it some tax advantages. For example, investors in mutual funds sometimes end up paying taxes on things the fund did before they bought into it. But with separately managed accounts, the individual investor is only responsible for gains and losses on his or her own transactions.

Also, separately managed accounts can be adjusted to help individuals meet their tax needs by offsetting losses or gains in other investments, said Nathan Mersereau, president of Oakland Wealth Management Inc., a registered investment advisory firm in Southfield, Mich.

Critics point out that the tax advantages only apply if the accounts are held outside of tax-sheltered environments such as retirement plans. Also, some say that investors may end up wrangling the accounts to offset other gains and losses in ways that compromise their overall goals.

The accounts were at one time only used for investors with millions of dollars. But nowadays many accounts are available to investors with $100,000, and some drop the limit to $50,000. The Money Management Institute said the average account size is roughly $250,000.

For investors in the $50,000 range, separately managed accounts might not make sense, said Jody Eisenman, chief executive of the New York brokerage and investment firm Perrin, Holden & Davenport Capital Corp. That's because it could be hard to get adequate diversification with that amount of money. Those investors might be better suited to buying a couple of mutual funds, he said.

Separately managed accounts are also touted for their transparency, allowing investors to see what stocks and bonds have been bought and sold by the account manager. This contrasts with mutual funds, which typically only divulge their holdings every three to six months and may have had other holdings in the interim that aren't reported to investors.

But internist Joel Greenwald, MD, an adviser with Affiance Financial in Minnetonka, Minn., said that transparency can backfire. He had one physician client with a separately managed account who became obsessed with questioning why the manager was holding on to a stock that wasn't doing well.

"Because he could see the positions, it made it worse for him," said Dr. Greenwald. "It's sort of like making sausage -- he didn't want to see the process."

The doctor liquidated the account and then invested the money in a mutual fund with the same manager, and he was much happier. And that was just fine with Dr. Greenwald, who knows that separately managed accounts are popular but hasn't jumped on the bandwagon touting them.

"It's the wrapper and it's the cachet and I don't know that the client is coming out better in the end," he said.

Some critics say separately managed accounts are costlier than similar investment vehicles, though there is some debate about this. Clark said fees for separately managed accounts typically total 2% to 3% of the assets being managed, whereas total costs with mutual funds can reach 3.5%.

But Eisenman said separately managed accounts might carry higher fees than other investments that are managed as part of "a big pool of money," because there is more work for the manager to do with multiple individual accounts.

"Those fees are going to cut into your performance," he said.

Certainly the performance of these accounts depends on the investor's strategy and the manager's ability. And with that, there is some risk that the investor will get a bad manager. But Eisenman said that risk is no greater with separately managed accounts than it is with any other investments that have managers.

Investors trying to decide whether separately managed accounts are right for them should first consider whether they want to manage the account themselves or have a professional do it. "If you want to manage an account yourself, there's really no reason to have" one of these, he said.

But for physicians, having a managed account might be attractive as a time-saver. "You have the investment manager handling day-to-day decisions for you," said Mersereau. "That can free up your time to focus on your work as physicians."