Dow Jones Columnist Bill Donoghue says that separately managed accounts are worth the fee, calling the tools “one of the best-kept secrets in America.”

For financial advisers, this can mean an easy sell by appealing to investors’ logic.

“They’re cheaper than hedge finds and offer higher, potentially safer returns than traditional mutual funds,” Donoghue writes.

When it comes to the hunt for alpha, he says, “Separately managed accounts have added it, and mutual funds have deducted it.”

After fees, the average alpha among 3,336 mutual funds, he notes, was –0.74, compared to a positive 0.70 for SMAs. The introduction of low-cost exchange-traded funds into SMAs makes the portfolios and even smarter investment, he said.

With fees, on average, around 2%,  and options for active or passive management available to investors, Donoghue urges investors to consider these products both inside and outside of qualified plans, such as Roth Individual Retirement Accounts and variable annuity plans.

Furthermore, after so-called distribution, or 12b-1 fees, mutual funds can cost as much as 5% in front-load costs, while SMA fees, which run between 0.5% and 2%, can often be negotiated, especially for accounts over $1 million.

“The point is not to focus on the fees but the value added by more imaginative and less-rigid managers of separate accounts over traditional mutual funds,” Donoghue wrote. “Alpha is a measure of value, not expenses.”

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