A Separate Account is a professionally managed portfolio of individual securities. Generally, it is an investment consulting relationship in which a client's money is placed with one or more money managers, and all administrative and management fees, along with commissions, are wrapped into one comprehensive fee, which are often paid quarterly. The fee varies but is often 1% - 3% of the assets. An average minimum investment is usually $25,000. From the client's perspective, they have access to top investment managers that they wouldn't have been able to invest with alone, since there can be a $1 million dollar minimum to be a high net-worth client of these top managers.
Not long ago, separate accounts were the privilege of only the wealthiest. But, reduced operating costs, technology, and fierce competition has made separate accounts much more accessible. Account minimums, commonly at $1 million just a few years ago, have widely fallen to $100,000 and lower.
Tax efficiency - Money managers can time a client's trades for optimal tax treatment based on the client's specific needs.
Customization - The portfolio of stocks and bonds is tailored to the individual's need. Clients may choose to not hold a particular company or industry in their portfolio for personal, ethical, or economic reasons.
Simple cost - Most separate-account sponsors charge a simple fee based on assets under management, rather than discrete fees for each service (such as advice and trading commissions). In addition, the fee tends to decline as assets under management increase.
Stability - A separate account by definition is not subject to the effect of cash flows from other investors, as in a mutual fund, that can sometimes force managers to take steps that impede the fund's return.
4How do we place a separate account in a Morningstar Category?
We assign a Morningstar Category the same as we do for other universes.
The Morningstar Category identifies separate accounts based on their actual investment styles as measured by their underlying representative holdings (portfolio statistics and compositions). If the separate account is new and hasn't provided Morningstar with its representative holdings, we use qualitative measures to estimate where it will fall before assigning a more permanent category. When necessary, we may change a category assignment based on current information.
4What are Representative Holdings?
Representative Holdings are the underlying securities that make up the separate account. Representative holdings are provided by the asset manager and are intended to show the types of investments made in accounts run by the manager. They do not represent all of the securities purchased, sold or recommended for advisory clients. Representative holdings may differ from the holdings in any individual portfolio managed by the firm.
4Why can't I find a separate account I know exists?
Separate Accounts are unregistered, private investment relationships. There is not a public source for separate account data. Asset management firms running separate accounts voluntarily submit data to Morningstar. Morningstar has provided every asset manager with full access to our data entry system, enabling them to easily upload their information at any time. Some have not yet been able to provide data to Morningstar for our new database, which explains holes in our coverage. To learn more about how to update your firm's data, please contact the separate account database team at separateaccounts@morningstar.com.
4Do separate account total returns include fees?
Most of the time a firm sends us gross returns, but there are some firms that send net returns.