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Pros and cons of separately managed accounts
With a separately managed account, instead of buying shares of a mutual fund or selecting stocks himself, your broker or financial adviser parcels your money out to one or more independent money managers. The separate account manager will in turn buy individual stocks for you. Sometimes he'll try to match the performance of a particular mutual fund by buying most or a representative sample of the stocks in that fund.
Let's examine the pros and cons of separately managed accounts, starting with the advantages:
You can save on taxes. This is probably the chief, most incontestable advantage of a separate account. If your practice is raking in money, or you've received a windfall on some other investments, you can instruct your money manager to hold stocks rather than sell them and incur capital gains. Or conversely, if your income is down, you can ask him to take profits and go heavy with gains.
By holding individual stocks in a separate account, you'll also avoid being socked with capital gains distributions that are endemic to mutual funds. In a mutual fund, the capital gains taxes are based on the mutual fund's cost basis, not on your cost basis. Say, for example, you buy into a fund on December 1, when Company A is selling at 23 a share. Two weeks later, the fund sells that company, and gets capital gains based on their purchase price 10 years ago at 4 a share. You're zapped with a 19 per share capital gain. In a separate account, if you bought it at 23 and sold it at 23, there's no capital gain.
True, capital gains often get evened up in the future when you sell your mutual fund. But in the meantime you've laid out money sooner than you had to.