A Review of Two Managed Accounts

The first job I had out of college was building back office systems for Charles Schwab. While there they encouraged everyone to learn about the industry and encouraged anyone who wanted to get a Series 7 securities license. I took full advantage and learned a lot about investing and managing money.

Another resource I really enjoy is r/personalfinance, which is a community that comes together to help people who need financial advice -- job negotiating, investing, retirement, home purchase, debt, etc. One common thread is how do you get started investing - it's so common, they have a wiki where everyone should start https://www.reddit.com/r/personalfinance/wiki/investing.

Reading through the wiki, you'll see they recommend prioritizing funds with low expenses and say:

Actively managed funds. These funds have a management team that is actively picking and choosing, buying and selling stocks in an attempt to "beat the market" and "buy low, sell high". Unfortunately, they often come with much higher fees.

While not in the wiki, one of the first responses from the community when selecting a financial advisor is to pick a fee only advisor, I highly suggest reading this article from Forbes Fee-Only Financial Planner: What's the Difference?. This is really the crux:

Fee-only financial planners are registered investment advisors with a fiduciary responsibility to act in their clients’ best interest. They do not accept any fees or compensation based on product sales. Fee-only advisors have fewer inherent conflicts of interest, and they generally provide more comprehensive advice.

Alright without further ado...

Managed accounts (rhymes with Sterile Pinch)

I recently was reviewing some managed equity accounts - we'll call them M26 and 454. These are "actively managed funds designed to track the S&P 500" as the asset manager described

Daily % change in M26, 454, and the S&P

This is a line graph of the daily movements in basis points of both accounts vs the S&P as listed on the Merrill online dashboard each day for 3 months.

Looking at this, you'll notice that both accounts track the S&P pretty closely, M26 seems to be a bit more conservative, it doesn't quite gain or lose as much as the S&P (beta < 1), but not by a significant amount. The advisor provided quarterly narratives that explained that the accounts performed very closely. Without further inspection - one would think they are in good shape, but lets dive a little deeper.


Recall that I said that both accounts are actively managed accounts - so that means that this account is always selling in and out of different stocks in an attempt to achieve it's goal. As of month end 6/30/2016, M26 held 38 individual stocks, 37 of them were in the S&P.

I went back to 1/1/2010 (as far back as I could online), tracking month end account balance vs a normalized SPY, and then a normalized SPY where I added advisor fees back:

M26 performance vs SPY and SPY with advisor fees over 6.5 years

Here are some data points:

  • 1/2010, Beginning Balance $198,406.85
  • 7/2011, Deposit $25,000
  • 9/2013, Deposit $140,000
  • Total Management Fees over the time period: $42,110.64
  • Management fees on the account yearly were ~1.8%

Balance as of 6/30/2016

  • M26: $581,532.85
  • SPY: $653,622.92 (+$72,090.07 | +12.4%)
  • SPY with fees added back: $709,475.60 (+$127,942.75 | +22%)

Those are some staggering numbers. The "managed account" underperformed the S&P (SPY) by $72K. The killer is that when you add back the management fees, it underperformed by $128K.

There are a number of takeaways here:

  1. This "actively managed fund" performed worse than an index fund. In fact, a majority of actively managed mutual funds are being outperformed by passive
  2. It got even worse when accounting for the management fees that were lost over time.
  3. The management fees were ~1.8% for managing this account (typically it's closer to 1%, 1.8% is next to crazy)
  4. Fees accounted for roughly 40% of the under performance
  5. The short term view (3 months we started with), can be very misleading, small differences in performance overtime really start to compound.


Looks pretty similar...

And the data points:

  • 1/2010, Beginning Balance $75,859.97
  • 5/2014, Deposit $65,000
  • 6/2013, Deposit $74,000
  • 7/2011, Deposit $75,000
  • Total Management Fees over the time period: $29,161.30
  • Management fees on the account yearly were ~1.8%

Balance as of 6/30/2016

  • 454, $435,181.74
  • SPY: $477,432.38 (+$42,250.64 | +9.7%)
  • SPY with fees added back: $514,689.99 (+79,508.25 | +18.3%)

My advice is to just stick it into a low cost index and skip trying to beat the market.