ThomasKostigen

SANTA MONICA, Calif. (MarketWatch) — To hear the devotees speak about them, you’d wonder why you would put your money anywhere else.

The best money managers in the world, those that typically require at least a million-dollar investment minimum, will oversee your assets the way you want. For you, they’ll accept accounts as low as $10,000, and will more efficiently manage your taxes from capital gains. With newfangled technology, you can even have multiple managers handling your portfolio with one goal in mind: to grow your assets.

And just to be sure everyone is on the same team, you’ll only be charged a percent of those assets being managed. That way, as your money grows so too do managers’ commissions. Incentive enough, right? And don’t worry, those commissions will be far less than what the typical investment vehicles of this sort — mutual funds — charge.

For about 20 years now that pitch has been refined and grown into a half-trillion dollar industry under the title separately managed accounts. It’s taken a chunk of money out of mutual fund coffers, and it’s steamrolling ahead under the direction of Wall Street’s biggest brokerages and sales forces.

But people who invest in separately managed accounts may be getting no better treatment, services or returns than those mutual funds against which they are pitted.

Highly technical academic studies of separately managed accounts — particularly an examination by Canadian investment manager Phillips, Hager & North — show barely distinguishable characteristics between them and mutual funds.

Here’s why: While the overall commission structure is generally touted as being less on a managed account than a mutual fund, that isn’t the case anymore. Mutual funds fees and commissions have been driven down by competition, so while a separately managed account fee hovers between 1.10% and 1.75%, the average equity mutual fund charges 1.49%, according to the Investment Company Institute, the mutual fund trade organization.

That parity puts performance in the drivers’ seat, and there are no comprehensive studies proving money managers of mutual funds underperform the hyped institutional managers of separately managed accounts; it’s marketocracy. (In fact, in a curious twist of functions, many mutual fund managers also handle separately managed accounts.)

The next differentiator then becomes customization, or control. The reason separately managed accounts are regulated like mutual funds and are considered private accounts much like hedge funds is that they are supposed to allow individual investors a say in the management of their portfolio. For example, if you don’t want any tobacco stocks in your holdings, you can instruct your portfolio manager to screen these stocks out. But that, according to separately managed account executives themselves, rarely occurs.

Despite the much-hailed private account aspect of separately managed accounts, most of them are run off what brokerages call model portfolios, which means each portfolio is managed just like that model — not customized.

The customization element of separately managed accounts is important because it speaks to the supposedly most compelling benefit of the vehicles: the ability to lessen taxes. When you invest in a mutual fund, you get the community syndrome of sharing the same pool of taxes with everyone who’s ever invested in that fund. So, if you invest in a mutual fund in the third quarter of the year and the manager overseeing the fund decides to sell a stock position, you are subject to the capital gains on that position from its basis, not from your buy time.

Separately managed account investors have the ability to instruct their portfolio manager to wait on stock sales within the portfolio, and/or match those sales, if they are gains, with losses from other stock positions within the portfolio. This is called harvesting in finance jargon and it’s no coincidence that the practice most often takes place in October when managers are doing year-end purging of their portfolios. (Those of you attuned to the moon or farming will note it’s a different type of harvest season).

However, the propensity for investors to take advantage of this opportunity is slim as well. And Phillips, Hager & North points out after four years mutual fund investors pay less tax on subsequent annual capital distributions. (Bush’s lowering of the capital-gains tax rate also plays into this phenomenon.)

Moreover, advisers who sell separately managed accounts may have initially pitched this tax-benefit scheme, but portfolio managers who actually handle the accounts day to day are none too keen to hold out this offer to investors. After all, one portfolio manager may oversee a separately managed account program for thousands of investors. Imagine if they all called in buy/sell orders?

Then again, too few people are exercising their rights as separately managed account owners. Passively investing in these vehicles makes no better sense than investing in mutual funds, and exposes investors to a far less regulated environment that cheats people of the timely disclosures and transparency measures mutual funds afford.