Separately Managed Accounts and Alternatives

[Fleur58]

I had 100 K sitting at Capital One since 2017 generating minimal interest. I don't need this money, it was my peace of mind stash.
I am semi retired, working 2 days a week. No major bills other than household utilities and entertainment. I have more than adequate Traditional Retirement and Roth retirement money plus at least 3K per month in SS to live on at age 67. I am 63 now. Plan to stop work at age 65 and live off my non retirement savings and a small pension until age 67. I can use my Roth money as my emergency fund, if need be.

I decided to let go of the cash stash. This year, I used 20 K on a down payment on a car, and 5K on a vacation. With the 75 K left, I sent 50 K to Fido. I now have 100K just sitting in cash at Fido. My free advisor suggested I try a Separately Managed Account (SMA), invested in around 80 Equity High Dividend Stocks. He suggested this as a tax efficient way to own stock outright. They do the selecting, and they charge a 0.9% annual fee, no commissions to buy stock. Its a 100K minimum.

I'd like the money to grow. I hesitate because of this 0.9% fee. I own about 450K of other non retirement mutual funds. I don't know how to pick stocks. Has anyone ever had this type of SMA account and what are your thoughts? I know I will not like seeing the fee (.25% of .9) deducted every 3 months. Can I do just as well by buying 100K of ETFs in the same categories that the SMA? Alternately how would you invest this money in a set and forget it strategy for years? I don't want the Vanguard 3 Fund strategy, I already own that. Looking for Pros, Cons, and different Alternatives for the SMA.

 

[njhowie]

And why would you do this, owning about $1200 in 80 different stocks, when you could simply buy a mutual fund or ETF that has the same focus as being suggested? To me, it just seems that the SMA + advisor is an unnecessary layer.

 

[Fleur58]

And why would you do this, owning about $1200 in 80 different stocks, when you could simply buy a mutual fund or ETF that has the same focus as being suggested? To me, it just seems that the SMA + advisor is an unnecessary layer.

Could you give me a few examples? Do you mean something like VYM?

 

[njhowie]

Could you give me a few examples? Do you mean something like VYM?

Exactly

Maybe FDVV or FDRR

 

[OldShooter]

... My free advisor suggested I try a Separately Managed Account (SMA), invested in around 80 Equity High Dividend Stocks. He suggested this as a tax efficient way to own stock outright. They do the selecting, and they charge a 0.9% annual fee, no commissions to buy stock. Its a 100K minimum.

Well, he's worth exactly what you paid him for the suggestion. I wonder if he knows that dividends are taxable. He does know he'll get a spiff if he sells that 0.9% SMA.

... Can I do just as well by buying 100K of ETFs in the same categories that the SMA?

No. You'll probably do better.

... Alternately how would you invest this money in a set and forget it strategy for years?

Any total market ETF would be fine. A slight optimization would be to find a fund that is "tax managed," but be careful to avoid high fees which would eliminate the benefit of the strategy.

... I don't want the Vanguard 3 Fund strategy, I already own that. Looking for Pros, Cons, and different Alternatives for the SMA.

IMO you would be better off looking at your whole portfolio as a unit and developing an overall AA strategy. The $100K could be all of or part of the long-range component of the portfolio. Both an AA viewpoint and a "bucket" viewpoint might be useful to you for thinking about your strategy.

 

[MRG]

I got that pitch and passed, too rich for me.

 

[RetiredHappy]

Don't do it! We had Merrill Lynch manage our investments, including a separate account for dividend stocks - stock picking individual stocks. The account always lagged in growth compared to our other managed accounts. Our FA kept assuring us that these were value stocks and would catch up in time - it has been 5 years... Anyway we transferred our accounts out and decided to look into each holding to see what we would sell. OMG, they picked the most god awful stocks, sunset industry, companies that we had not even heard off. Many of these positions have been in the negative, not counting the 2 to 4 percent dividends that they generate. We could not get rid of all these stocks fast enough. Buy total market ETF and you will sleep better.

 

[yhoomajor]

"80 Equity High Dividend Stocks" - or you can just buy SCHD or VYM. Both are pretty good.

 

[38Chevy454]

Instead of 80 stocks, you could have 500 by just buying S&P 500 index fund. Yes it may not be quite as tax efficient, but with very low or no fees, you have 0.9% ahead along with even more diversification.

 

[mrfeh]

I now have 100K just sitting in cash at Fido. My free advisor suggested I try a Separately Managed Account (SMA), invested in around 80 Equity High Dividend Stocks. He suggested this as a tax efficient way to own stock outright. They do the selecting, and they charge a 0.9% annual fee, no commissions to buy stock. Its a 100K minimum.

That's a bummer. The advisor is doing nothing but looking for ways Fido can make money.

Please, please read this; it will take you less than an hour and reap many rewards:

https://www.bogleheads.org/wiki/Bogleheads®_investing_start-up_kit

Just choose your overall asset allocation and buy index funds.

 

[sengsational]

You could start the SMA, copy the list that they recommend, randomly select 20 or 30 from the list and pull the money out and into your list. Without the expense drag, even if your picks are unlucky, you'll probably come out ahead. You might also find the list without even getting in. But you might make even a better return just going with a dividend ETF.

 

[pb4uski]

....I now have 100K just sitting in cash at Fido. My free advisor suggested I try a Separately Managed Account (SMA), invested in around 80 Equity High Dividend Stocks. He suggested this as a tax efficient way to own stock outright. They do the selecting, and they charge a 0.9% annual fee, no commissions to buy stock. Its a 100K minimum. ...

There are many, many dividend focused equity funds and ETFs out there. You might want to look at VIG and NOBL... but the reality is that they are not all that different from your run-of-the-mill S&P 500 fund or ETF.

 

[OldShooter]

There are many, many dividend focused equity funds and ETFs out there. You might want to look at VIG and NOBL... but the reality is that they are not all that different from your run-of-the-mill S&P 500 fund or ETF.

Complex issue, really. OP says she want the money to grow. I think stocks paying dividends tend to do less growing because they are more mature and possibly do not have internal investment opportunities that are better for the shareholders than giving them dividends. One partial answer is to reinvest all dividends but since this is a taxable account, the tax authorities will give the divs a pretty serious haircut -- reducing the power of compounding. All of that is why I recommended a total market account instead of a div oriented portfolio.

A shorter way to say this is: I think the Fido guy was totally off base in recommending a div oriented portfolio.

 

[Fleur58]

I need to give some more info to see if your advice will change. In this taxable account, along with my 100K cash; I own the following: Please don't lambaste me , I have owned most of these funds a very long time and they have appreciated a lot. The only high expense ratio one I could consider selling this year with the lowest tax impact is the PRHSX.

Fidelity Zero Total Market: FZROX 114K exp ratio 0
Fidelity Select Software/Computer 104K FSCSX exp 0.7
Fidelity Leisure FDLSX 87K ER 0.77
TRowe Blue Chip TRBCX TRBCX 67K ER 0.68
TRowe Cap Appreciation PRWCX 48K ER 0.7
TRow Health PRHSX 44K ER 0.76


When I say I want it to grow, I mean it should at least do better than it was languishing over at Cap One. All of my bond funds are in my tax advantaged accounts.

Whatever I do, the expense ratio needs to be low. Fidelity has two other stock index funds: FNILX Large cap (similar to SP 500) and an extended market FZIPX. What if I were to divide the 100K between these two?

I was also thinking of selling PRHSX to get rid of another high ex ratio fund, and put the proceeds in FZROX.

 

[jazz4cash]

Sounds like in addition to the high cost mentioned by you and others, likely underperformance, etc you can add capital gains taxes to get out of the funds you already own.

 

[ncbill]

You could start the SMA, copy the list that they recommend, randomly select 20 or 30 from the list and pull the money out and into your list. Without the expense drag, even if your picks are unlucky, you'll probably come out ahead. You might also find the list without even getting in. But you might make even a better return just going with a dividend ETF.

IMHO it would be better to follow a strategy like "Dividend Aristocrats" if the OP wants individual dividend-paying stocks instead investing in a high-yield dividend index...I'd still go with the latter even at a lower yield.

 

[mrfeh]

I need to give some more info to see if your advice will change. In this taxable account, along with my 100K cash; I own the following: Please don't lambaste me , I have owned most of these funds a very long time and they have appreciated a lot. The only high expense ratio one I could consider selling this year with the lowest tax impact is the PRHSX.

Fidelity Zero Total Market: FZROX 114K exp ratio 0
Fidelity Select Software/Computer 104K FSCSX exp 0.7
Fidelity Leisure FDLSX 87K ER 0.77
TRowe Blue Chip TRBCX TRBCX 67K ER 0.68
TRowe Cap Appreciation PRWCX 48K ER 0.7
TRow Health PRHSX 44K ER 0.76


When I say I want it to grow, I mean it should at least do better than it was languishing over at Cap One. All of my bond funds are in my tax advantaged accounts.

Whatever I do, the expense ratio needs to be low. Fidelity has two other stock index funds: FNILX Large cap (similar to SP 500) and an extended market FZIPX. What if I were to divide the 100K between these two?

I was also thinking of selling PRHSX to get rid of another high ex ratio fund, and put the proceeds in FZROX.

Please read the Boglehead Investing Startup page I mentioned above.

If you're looking to invest in US equities, just put it all in FZROX.

 

[OldShooter]

... I have owned most of these funds a very long time and they have appreciated a lot. The only high expense ratio one I could consider selling this year with the lowest tax impact is the PRHSX. ...

Common advice around here is "Don’t let the tax tail wag the investment dog." What you list is a sort of salad of sector funds; nothing truly terrible about that but it's also true that trying to predict sector performance is a fool's errand. See https://www.callan.com/periodic-table/ If it were me, my long term objective would be to ditch the sector funds with minimum tax pain by managing our income to stay out of the higher tax brackets. All things are easy to he who does not have to do them, of course.

... Whatever I do, the expense ratio needs to be low. Fidelity has two other stock index funds: FNILX Large cap (similar to SP 500) and an extended market FZIPX. What if I were to divide the 100K between these two?

You are wise to be focused on expenses, of course. You will get no arguments here IMO. Nor will Morningstar argue: https://www.morningstar.com/articles/752485/fund-fees-predict-future-success-or-failure.html

Re FNILX and FZIPX, that proposed ratio is essentially another sector bet -- de-emphasizing large caps. I am not smart enough to predict whether that is a winning idea or not, so for us I would just buy Fido's total market fund and forget about making a bet for or against large caps.

Overall, remember that holding a bunch of different mutual funds around the total market theme is really just signing up for a bunch of extra work. A year or so, we got our portfolio essentially down to just one fund: VTWAX. That's basically every stock in the world. Some will say that is too much international bias but, hey, that's really "total market" with no sector bets. Here's one of the investment gurus: French on International: https://famafrench.dimensional.com/videos/home-bias.aspx

Speaking of Ken French, here are his thoughts on dividends: https://famafrench.dimensional.com/videos/homemade-dividends.aspx

 

[Another Reader]

I need to give some more info to see if your advice will change. In this taxable account, along with my 100K cash; I own the following: Please don't lambaste me , I have owned most of these funds a very long time and they have appreciated a lot. The only high expense ratio one I could consider selling this year with the lowest tax impact is the PRHSX.

Fidelity Zero Total Market: FZROX 114K exp ratio 0
Fidelity Select Software/Computer 104K FSCSX exp 0.7
Fidelity Leisure FDLSX 87K ER 0.77
TRowe Blue Chip TRBCX TRBCX 67K ER 0.68
TRowe Cap Appreciation PRWCX 48K ER 0.7
TRow Health PRHSX 44K ER 0.76


When I say I want it to grow, I mean it should at least do better than it was languishing over at Cap One. All of my bond funds are in my tax advantaged accounts.

Whatever I do, the expense ratio needs to be low. Fidelity has two other stock index funds: FNILX Large cap (similar to SP 500) and an extended market FZIPX. What if I were to divide the 100K between these two?

I was also thinking of selling PRHSX to get rid of another high ex ratio fund, and put the proceeds in FZROX.

I actually like your portfolio except for the leisure fund. I have owned the same T Rowe Price funds for many years and they have done very well, net of expenses. Low expenses are preferable in general, but you need to look at performance net of expenses. Also own the other two Fido funds. Personally, I would not sell any of those. Not sure what I would do with the $100k, except maybe index funds, bought over a period of time.

 

[pb4uski]

... One partial answer is to reinvest all dividends but since this is a taxable account, the tax authorities will give the divs a pretty serious haircut -- reducing the power of compounding. ...

I dunno about that... qualified dividends are tax-free for a married couple as long as your total income is below $105,900 so for a lot of people qualified dividends are tax-free... and even above that the tax is only 15% until you get into the really high Old Shooter tax brackets.

 

[target2019]

I roll with SCHD into the future for the taxable account. Buying 80 stocks and paying a fee is ridiculous IMO. I'm sure Fidelity has an adequate ETF screener which will bring up a list of candidates based on your characteristics.

 

[yakers]

I roll with SCHD into the future for the taxable account. Buying 80 stocks and paying a fee is ridiculous IMO. I'm sure Fidelity has an adequate ETF screener which will bring up a list of candidates based on your characteristics.

I like SCHD but in a tIRA because of taxes , do you spend the dividends as income?