Agents See Opportunities In Alternatives To Mutual Funds

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While agents like Michael Goss and Thomas Mignone will continue to market mutual funds (see cover story on page 4), they see new opportunities for investors in both wrap accounts and separately managed accounts.

“The industry is moving towards wrap accounts,” says Goss, who is president of Michael Goss and Associates, Overland Park, Kan.

Wrap accounts pay commissions to advisors as an annual fee that is a percentage of an investor’s portfolio, explains Goss. Wrap account commissions are not transaction-based, so it’s in the advisor’s best interest to grow the portfolio. Both the investor and the advisor benefit from the success of the investments, says Goss.

Mignone, a detached MONY agent with Capital Management Group, New City, N.Y., notes that he will put clients who don’t want a commission relationship into a wrap account with no-load funds and charge a fee. “From that perspective we solve the commission issue and we have more of a fee relationship,” he says.

But Mignone also offers separately managed accounts for clients with large amounts of non-qualified money. “We’ve been using almost exclusively separate account management, as opposed to mutual funds.”

Mignone says a client will gain some tax efficiencies when using separate account management.

“The problem with mutual funds is that if I bought a fund in March, and in February they sold IBM shares that they bought in 1990–I wasn’t even in the fund when they owned it, but they may not distribute the capital gain until December 31,” explains Mignone.

“Now I have to pay tax on something this year that I did not participate in,” he says.

Mignone notes that while these gains are added back to the cost basis (and won’t be taxed twice), “it still taxes sooner rather than later, its a phantom income situation. I didn’t personally make the money on that stock, so I resent paying tax on it. Investors don’t like to be taxed this year on something they didnt personally benefit from.”

Mignone says that with a separately managed account, the only time an investor would have a capital gain is when the manager sells a stock that was held at a profit to the investor. “You’re taxed individually on your holdings,” he says.

In a mutual fund, Mignone says, “all your money is invested right away. In a separate account, the manager will deploy the money as he sees fit into only things that fit his buy list. He doesnt have to put the money to work immediately.

“If I buy into a fund today, in essence every stock they hold is a buy for me today,” he explains. “In a separate account, the manager may be ready to sell some stocks, so when I put my money into a separate account the only stocks I buy are the ones that are on the buy list today.”

Separate account management is not for everybody, he says. Typically the minimum is $100,000 per manager and since each manager follows a different investment discipline it takes several hundred thousand dollars to be well diversified.

Mignone contends, “I can’t imagine why anyone with half a million of non-qualified dollars would put it in mutual funds in this day and age, there’s just no reason for it with these programs out there.”


Reproduced from National Underwriter Life & Health/Financial Services Edition, December 17, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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