Do you have a separately managed account? If so, you might want to reconsider.

What is a separately managed account?

This is basically your own private mutual fund. A money manager buys a number of securities that are held in your account. Your money manager makes the decisions as to what securities are held in your account, but you can provide guidelines and input. You get to see the actual stocks and bonds that are purchased. You have your own cost basis and you can tell the manager how to customize the portfolio to suit your needs.

Why brokerage houses love to sell separately managed accounts

Top financial planners wont sell these, but salespeople will because they love fees and commissions. The broker charges an annual fee that can be as high as 3% annually. Also, separately managed accounts often hold over 100 securities. And there is often a great deal of buying and selling going on. When a broker does lots of trading, it costs you money. They may or may not charge you directly, but you pay for it.

One secret way you pay for these transaction is the mark-up. This is the difference between the price you pay the broker for the securities and the price the broker paid at first. The brokerage buys those stocks “wholesale” and then resells them to you at “retail” – with a mark-up. It’s very hard to know what that mark-up is. But just know that the more securities in the portfolio and the more often they are traded, the more a separately managed account costs you.

Why do investors buy these?

Some do it for snob appeal. The broker convinces them that they’ll have a customized portfolio. They go on to sell investors on the idea that the manager will watch each portfolio individually. The latter is false and the former isn’t a benefit.

The last thing you want is a customized portfolio. First, if you are skilled at picking securities, why hire a financial manager in the first place? But if you do hire someone to manage your money, the last thing you want to do is override his or her decisions.

Second, a customized portfolio is very hard to track. Your money manager has hundreds of clients. Maybe thousands. Do you think the advisor has time to watch every single portfolio every day? They don’t. And if your portfolio is different than everyone else’s, the advisor won’t watch it at all. In fact, the more unique your portfolio is, the more likely it is that your manager will ignore it completely.

Can I think of any reason to buy a separately managed account? No.

Some people will tell you that such accounts offer more control over income tax liability, but you can manage your taxes better by purchasing funds with low turnover. (Read ETFs vs. Mutual Funds .)

In short, the separately managed account is an invention of Wall Street to benefit Wall Street. Tell anyone who tries to pawn one of these accounts on you that youre too smart to fall for it.