Scandal-Proofing With Separate Accounts

Do you know what makes a peaceful vacation with the kids? Separate rooms.

Do you know why Rob and Laura Petrie had such a happy marriage on the Dick Van Dyke Show? Separate beds.

Most importantly, do you know the best way to avoid the mutual fund mess entirely? Separate accounts.

A separate account, also called a managed account, is a professionally managed portfolio of individual securities. Like a mutual fund, a separate account offers investors diversification and experienced management. Unlike a mutual fund, investors don't have to worry about mixing their stocks with those of market-timers, late traders or any other unscrupulous market miscreants. All the stocks in a separate account are held in your own name and in your own account.

In light of the scandal in the mutual fund industry, what are the pros and cons of separate accounts?

The first major difference between mutual funds and separate accounts is the account minimum. With a typical minimum of $100,000, separate accounts are usually distributed by the private client services divisions of major investment houses and marketed to high-net-worth investors. Most mutual funds, on the other hand, have minimums in the $1,000 range.

The steep minimum for separate accounts is more a function of economics than elitism. Money managers have serious difficulties properly diversifying amounts less than $100,000 into the proper amount of names without leaving small odd lots of stock here and there. Therefore, the bar is set high before the process becomes too unwieldy.

Nevertheless, for those investors who are mad at their mutual fund companies but not yet in the moneyed class, don't give up on separate accounts just yet. For instance, GE Private Asset Management seems to have solved the diversification problem well enough to be offering separate accounts with minimums of $50,000.

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