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BROKER DEALING
Separate accounts are cheaper, more flexible and more tax efficient than mutual funds.
Separately managed accounts have become a mainstay financial product competing directly against mutual funds, but do you know why?
Separately managed accounts have reached their tipping point, which is defined as the moment of critical mass, threshold or boiling point. (For charts that illustrate the tipping point for separately managed accounts and compare managed accounts with mutual funds, visit AdvisorToday.com.)
Aside from the marketing hype to those with an elitist mentality, why is a separately managed account ideal for the much sought-after high-net-worth client? A separately managed account is attractive to affluent investors because although both products are similar in professional management, cost, diversification and liquidity, there are some major differences.
Mutual funds
With a mutual fund, your client owns shares in a company that owns a portfolio of stocks and bonds. The typical high-net-worth investor in mutual funds loses 25 percent of his total return to costs and taxes. Mutual funds distribute their dividends and realized capital gains to all shareholders. These dividends and any short-term capital gains are taxed as ordinary income. The current federal rates for income tax range from...