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Investor Discussions - Funds vs. Separate Accounts


Wealth & Pension Services Group
William Kring, CFP, AIF - Chief Investment Officer


The Difference Between Mutual Funds and Separate Accounts

Putting a comprehensive financial plan together is one of the most important things that you can do when you are planning for your retirement. However, with so many investment vehicles out there, it can be difficult at times to ascertain the correct one for your situation. Mutual funds are probably the most popular investment for the general public, but there are similar products, like separate accounts that may provide you with additional features that are worth consideration. Let’s take a quick look at the similarities and differences of these two investment vehicles.

What is a Separate Account?

At a very basic level, a separate account is a portfolio of stocks that are run by a professional money management on an individualized basis. These money managers have the ability to make decisions on a completely discretionary basis for each account, hence the name “separate account”. In addition, the investment decisions may differ from other accounts, typically due to customized objectives that are unique to your particular strategy.

Separate Accounts contain Actual Securities instead of Mutual Fund Shares

Mutual funds, like separate accounts, are also portfolios of securities that are run by investment managers. However, when you own shares of a mutual fund, you do not own the actual individual securities but instead you own a piece of the mutual fund itself. When you have an individually managed separate account, you own the actual stocks that are contained inside the portfolio.

Tax Advantages of Separate Accounts

There are many advantages that come with the ability to make customized decisions within your portfolio. One of the biggest benefits involve things like year end tax selling for the purpose of harvesting losses in taxable accounts.

Every year, you can claim income tax deductions of up to $3000 of capital losses on your tax return. Since separate accounts contain individual securities, a portfolio manager can identify stocks with losses at the end of the year, and take the proper steps to harvest these losses for tax purposes. However, please keep in mind that this is applicable only to taxable accounts, and this benefit would not be available in retirement accounts.

Separate Accounts offer Fee Transparency and Potentially Lower Costs

Separate accounts are usually comprised of a flat fee, which is charged as a percentage of assets under management. For example, if the management company is charging you a 1.5% flat fee on a $100,000 account, you would pay $1500 per year, typically on a quarterly basis. Another benefit in having a fee-based account is that it puts the portfolio manager firmly on your side. If they are successful in increasing your account value, they are rewarded, while if there happened to be a tough year in the markets, they would be penalized.

At WPSG, we have a variety of separate account managers that we work closely with to structure our client’s portfolios according to their long-term goals. Contact Us today to see how we can help.