This year nearly 2000 financial advisors paid an average of $900 to attend Charles Schwab Institutional’s (CSI) annual conference. The main topic of the conference was Schwab’s new service, called Managed Account Connection (MAC). The MAC service provides advisors a way to offer their clients individually managed accounts (the kind BWFA already offers). Mutual fund companies, mostly competitors to the MAC service, paid $6,000 each for a booth at the CSI annual conference, hoping with their efforts to turn back the rising tide of interest in their most threatening competitor, individual stock accounts.
Due to growing dissatisfaction with commingled accounts, many professional advisors are interested in the MAC program. Many investors who use commingled accounts will show losses on their funds and big capital gains tax liabilities in 1998-99, because funds were forced to sell stock (in August and September when the market dropped) in order to meet redemptions. More fundamentally, competent advisors are increasingly aware that commingled accounts 1) have too much money in one pot and move markets unfavorably whenever they buy or sell; 2) are tax-insensitive; 3) commonly force new investors to buy someone else’s capital gain; 4) are expensive, in light of the service they deliver; and 5) lack some highly desirable features of individually managed accounts.
Investor’s who use commingled accounts and those who use individually managed accounts do get some of the same service. For example, they get professional investment selection, custodial accounting and partial year-end tax reporting. But the similarity stops there. Investors who use individually managed accounts might also get lower taxes through tax-wise trading, lower expenses, individualized portfolio performance reporting, tailored tax reporting, have more of their money invested in the market at any given time (funds routinely hold cash in reserve to meet redemptions), have the portfolio manager available to answer questions personally, and get individualized accommodations for certain “investor preferences.”
Investor preferences can include raising cash for clients to meet unexpected expense needs with minimal impact on taxes through the use of margin, through offsetting gains and losses, or other techniques. Individual accounts can also avoid investments in specific securities (such as tobacco, managed health care companies, etc.), integrate major planned expenses into the investment plan (college, new beach house, etc.), or buy and hold specific investments at a client’s request.
And finally, when it comes to implementing an estate plan, individually managed accounts have distinct advantages over commingled accounts. These advantages come from the ability to control your income stream, avoid capital gains taxes entirely, and increase your tax deductions to lower your income taxes while living. Commingled accounts make use of these planning techniques difficult or impossible, whereas individually managed accounts can save you significant dollars.
Seasoned financial advisors have begun to realize that individually managed accounts offer their clients significant advantages and value over commingled accounts. This is why more and more advisors are trying to develop a way of offering them to their clients. BWFA came to this conclusion several years ago, and made the required investment in our business so that we could offer individually managed accounts to our clients, with all of the attendant benefits.
As you can see from the table below, individually managed accounts, like those at BWFA, offer significant benefits over investments in commingled accounts. Anyone using funds or using advisors who use commingled accounts to implement investment plans should carefully consider the benefits and value they are receiving compared to an individually managed account.
|“No Contest” Comparison of|
Commingled and Individually Managed Accounts
|Type of Service/Account||Commingled Account||Individually Managed|
Professionally Directed Investments
Partial (no cost basis or gains/loss reporting)
Full (income, cost basis, gains/losses)
Partial (at the asset level, not account level)
Full (at the combined account level)
On-call portfolio manager
Integrated Tax Management
No, tax insensitive
Yes, both buying and selling
Avoid specific investments
Include specific investments
Managed to meet unplanned expenses
Integrate planned expenses into investment plan
Estate planning advantages