Not too long ago, I pointed out that many brokerages across America have been cutting their commissions. Charles Schwab (Nasdaq: SCHW), for example, dropped its fee from $29.95 per trade to $12.95 (and it's even less for clients with bigger accounts). E*Trade's (NYSE: ET) commissions are now a buck lower, at $11.99.
That all seems good for investors, and it generally is. But it's clearly not unilaterally in the best interests of brokerages. You could argue that lower prices might benefit brokerages by attracting more customers or encouraging existing customers to trade more, but it's also true that lower prices mean lower profit margins.
Some brokerages are countering this by pushing a not-so-new offering: the "separately managed account" (SMA). Most of us probably have regular brokerage accounts, where we place our own buy or sell orders, or we act on recommendations from our broker. To use an SMA, you'd first confer with a financial advisor (we can help you find a good one) to determine your needs. Then, typically, the advisor would help you open up an SMA with a money manager at a financial institution such as Merrill Lynch (NYSE: MER), Morgan Stanley (NYSE: MS), Prudential (NYSE: PRU), Citigroup (NYSE: C), or Genworth Financial (NYSE: GNW), and you'd deposit at least $25,000 to $100,000 to start. The manager would then make trades in that account at his or her discretion.
The upside is that if this manager is really good, you might do well. But that's not the outcome I'd necessarily expect. For starters, you're going to be charged around 2% to 3% per year for the privilege of having an SMA. So if you earn 12% in one year, it might get reduced to 9%. If your initial nest investment is $100,000, you'll lose $2,000 to $3,000 in fees in a single year -- that's not chicken feed.
Another concern is that the manager might not be all that good. There's roughly a 50% chance, after all, that he or she will be below average. How can you tell? Well, that's another problem. If you invest in a mutual fund, it's much easier to check on the fund's record and thereby assess the skill of the managers.
Finally, think of why these accounts are being recommended by brokerages. Is it to serve you better? Maybe. But couldn't it also be for that 2% to 3% in annual fees? Some SMAs might serve some investors well, but study your options carefully before signing up.
And know that there may well be a better brokerage for you, one that serves your particular needs more effectively. Pop into our Broker Center for lots of guidance on how to find a better brokerage -- check out our handy comparison table there, too. (Did you know that some brokerages are charging as little as $5 per trade?)
Longtime
Fool
contributor
Selena Maranjian
does not own shares of any companies mentioned in this article.
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