Managed Accounts – Why To Avoid Them, And A List Of Alternatives

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Managed Accounts – The Alternatives

Managed accounts for binary options promise to make you money while you sleep, but the system is flawed. Luckily. There are three alternatives that provide a better service to traders while keeping more control in your hands. This article presents these alternatives, their advantages and disadvantages.

In detail, you will learn:

  • Why Not Managed Accounts?
  • Alternative #1: Signals
  • Alternative #2: Robots
  • Alternative #3: Social Trading

With this information, you will be able to pick the right form of automated binary options trading for you.

Why Not Managed Accounts?

Managed binary accounts promise that an account manager will take care of your money in the same way a mutual fund manager would when you invest in a stock market fund. Unfortunately, there are many problems with this concept:

  • Some brokers use managed accounts to scam you. They freeze your money, arguing that the account manager needs full control, but eventually, everything will be gone – allegedly lost in a series of bad-luck trades.
  • Your account manager is paid by your broker and your broker makes money when you lose money.
  • Because you make so many trades with binary options, even small fees can make your trading unprofitable.
  • It is often difficult to assess whether your account manager is a true professional and knows what they are doing.

As this list of problems indicates, using a managed account is risky. There are many unknowns, especially for newcomers. Someone who has never traded binary options before might find it difficult to judge whether their account manager is an experienced professional or a complete novice. These services often claim they are ideal for beginners – the opposite is true.

Nonetheless, the idea behind managed accounts is attractive. Hire someone to trade for you and make more money and save time. If you want to pursue this idea without getting a managed account, there are a few alternatives for you.

Let’s look at the three most popular options:

Alternative #1: Signals

Signals are based on a simple principle: a professional trader or a professional trading program tells you how to trade, but you have the last say. If you like a signal, you follow its instructions; if you do not like it, you simply do nothing.

Most signals come as text messages on your phone or as emails. A typical signal could read:

DOW JONES, LONG, 2 HOURS

When To Trade

This signal tells you to invest in rising prices for the Dow Jones and use an expiry of 2 hours. Signals are simple-to-execute and easy-to-understand, which is why they are so popular with traders.

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Most signal providers charge $99 a month for their subscription. If their signals are any good, they are definitely worth the money – good signals can easily make you more than $100 a month, even if you only have little money.

Good signal providers can win you around 70 percent of your trades, which is easily enough to make you money with binary options. Since almost all providers create their signals for high/low options, you have to win at least 60 percent of your trades to turn a profit. Everything above that value, and you make money.

Signal providers use two ways of creating signals:

  1. Automated computer programs. Some signal providers use computer programs that monitor the market and automatically create signals when the current market environment meets certain conditions. Such trading strategies are standard with short-term investments and can be highly profitable.
  2. Human traders send recommendations. Some signal providers use traders made of flesh and blood that monitor the market and send you recommendations. The profitability of these systems depends on the quality of the traders, which means that they can be quite good if you find a signal provider that employs qualified professionals.

Some signal providers are also trying to scam you. They provide random signals and hope that you stay with them for long enough to get at least some of your money.

Do Your Research

Luckily, you can recognise trustworthy signal providers by their money back guarantee. All signal providers that honestly try to win you trades provide you with a chance to test their signals risk-free. Usually, this test comes in the form of a 60-day money back guarantee where you can test the signals for two months, quit the service at any time, and get all your money back. Never sign up with a signal provider that denies you this testing phase.

Compared to a managed accounts, signals provide the advantage that you remain in full control of your account. You can recognise problems early and decide whether to trade every single signal.

The downside of signals is that you have to remain involved in the trading process. You have to be available and able to quickly react when you get a signal. Depending on your job and daily schedule, this might impossible.

Alternative #2: Robots

Robots take the idea of trading signals one step further. Just like signals, they monitor the market and search for profitable trading opportunities. The difference is that when a robot finds an opportunity, it automatically invests on your behalf.

The ways in which robots create signals are similar to those of signal providers. Some use automated computer programs; some use real-life traders.

To automatically execute its signals, your robot needs a connection to your trading account. This means sharing your login information and access to your money with another company. Some traders frown such a process and rather stay with signals, which is a legitimate decision. If you feel comfortable with a robot provider, however, you can also decide to take this step.

The fact that your robot must connect to your account also limits the available combinations of robots and brokers. You can always ask a broker’s customer support whether they can connect their robot to your broker, but sometimes this might be impossible for technical reasons.

Choose Your Own Broker

Some robots also use a list of recommended brokers that work best with the robot. More often than not, this list is a way of making the robot provider money. The broker gets a commission when they deliver a customer to the broker, and they use this convenient place to suggest that there is some technical necessity why you should quit your current account and get a new one. Be careful of these types of robot provides.

The advantage of robots is that you can completely outsource your trading process. That means you can minimise mistakes and leave the trading to the best professionals you can find.

In comparison to a managed account, robots provide the advantage of not being paid by your broker, thereby resolving the conflict of interest of an account manager who is employed by a broker that benefits when you lose money. Your robot provider makes money when you make money and keep subscribing to their service – which is a much more customer friendly business model.

Monitor Carefully

The downside of robots is that you relinquish complete control of your account. While your robot will be unable to steal your money, it could trade badly enough for you to lose everything. Unless you regularly monitor your account and stop a bad robot before it ruins you, you take a high risk.

In any case, you should carefully check your robot before you sign

Alternative #3: Social Trading

The third alternative to managed accounts is social trading. Social trading allows you to copy the trades of another trader just like you into your account.

To decide which trader to follow, you get a list of all available traders and their winning percentage. You will now that trader Dave has won 80 percent of his past trades, and you can choose whether to automatically copy his future trades into your account.

Most brokers also display the number of trades that a trader made over the last month or the amount of money they invested. Make sure to choose a trader that has made many trades. Otherwise, you risk following someone who has made only a handful of trades, which means that the winning percentage of such a small sample says nothing about the trader’s ability.

Copy Traders

Usually, binary options brokers allow you to adjust the amount of money that you invest in every single trade. This makes sense because those traders that you follow are often highly successful and invest a lot of money. For new traders, it is impossible to mirror the amount of money those people invest. By allowing you to determine how much you want to invest, your broker allows you to execute an effective money management.

Additionally, most brokers allow you to set a time limit for how long you want to follow a trader and a stop loss limit that automatically stops following the trader once they lose a number of trades or a specific amount of money.

These tools further increase your potential to protect your money. Even if a trader has won 80 percent of their trades in the past, they might lose 80 percent of their trades in the future. If you use social trading long enough, you will eventually follow a trader that is coming of a hot streak and running right into a losing streak. To survive such events, features that allow you to effectively protect your money are great tools.

Compared to managed accounts, social trading is an improvement.

  • You always get the latest stats on the trader who is investing on your behalf,
  • You can manage your money yourself, and
  • You get effective fail-safe tools.

These tools help minimise the downside and maximise the upside of automated trading.

Managed Accounts Overview

There are legitimate alternatives to binary options managed accounts. These alternatives target different kinds of customers with different goals. The main alternatives that you should know are:

If you want to keep complete control about which trades you make, use signals. To completely outsource your trading to someone who has nothing to do with your broker, choose robots. And to use a mix of automation and control, use social trading.

How to Find the Best Managed Accounts

A managed account—sometimes called a wrap account—is a type of investment management service that packages together a group of investments for you. Some managed accounts offer a good service for the price while others have high fees and tax inefficiencies. The challenge is figuring out which is which.

Types of Managed Accounts

An investment advisor may manage a portfolio of stocks, which is often referred to as a “separately managed account.” An investment advisor may also manage a portfolio of mutual funds; if this mutual fund management service also covers the brokerage fee costs, it is called a “wrap account.”

A financial advisor may recommend you invest your money in both separately managed accounts and wrap accounts, in which case you may be paying several layers of investment fees.

Layers of fees can make the wrong type of managed account excessively expensive; remember the higher fees, the lower the returns for you. Investment management is not a service where paying more delivers higher returns. It has been proven in mutual funds that the higher the mutual fund fees, the lower the fund returns are likely to be.

Index funds charge about 0.10 to 0.35%. That means if the advisor is charging 1%, and using index funds inside the account, total fees end up being about 1.25%. That is reasonable. But if the advisor is using higher-fee funds and there is a lot of trading and trading costs, you can end up paying total fees of 2 to 3% a year. That’s a lot!

Taxes

Actively managed accounts often have frequent trading that occurs inside them, which means they are not very tax-efficient, so for non-retirement money, they may not be the best solution. Accounts that turnover your account, or make frequent changes to your portfolio, incur higher transaction fees, and result in a higher tax bill for you. This increased fee reduces your net investment return—your return after taxes and fees. Net returns are what matters.

If you have money in non-retirement accounts, or a combination of retirement and non-retirement accounts, then what you need to pay attention to is after-tax returns. A good investment advisor can place tax-efficient investments in your non-retirement accounts and tax-inefficient investments in your retirement accounts. It is a process called “asset location.” When this is done properly, research shows it can significantly increase your after-tax returns.

How to Find the Best Managed Accounts

Kind of like doing your taxes, you can do it yourself, or pay someone to do it for you. What you are paying for is someone who will build an appropriate allocation, choose low-cost funds to fill in that allocation, monitor it, rebalance when needed, and report on the results so that you know your percentage return each year.

You need to decide if you are a do-it-yourself person or if you prefer to delegate. Professionals tend to follow a more disciplined process. So, that in itself can lead to better results. However, if you were able to follow that disciplined process on your own, then you would achieve the same results.

Hiring someone does not mean they will achieve higher returns than you would on your own. It means you are hiring them to follow a disciplined and consistent investment process and build an appropriate portfolio for you. If you want to delegate, these guidelines will help you find the best-managed account:

  • Pay attention to total costs. Ask for an estimate of all trading costs, fund fees, and advisor fees. Make sure total fees are 2% or less a year.
  • If you have money in after-tax accounts as well as retirement accounts, find advisors who manage for after-tax returns.
  • If you have money in many different types of accounts, find an advisor or managed account platform that will manage your assets across a household, not at an individual account level.
  • If you want an online solution to manage your money automatically, check out some of the top robo-advisors.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.

7 Common Mistakes to Avoid When Naming Your Beneficiaries

As I was boarding a recent flight with my husband, I had a sudden pang…if something happened to us, was I sure that the beneficiaries we had designated to receive our assets were up-to-date? Were our assets titled correctly, and had anything changed since the last time we reviewed them?

Even financial advisors can have these nagging questions because things happen in life that can cause decisions we made in the past to change. Certainly, after any major life change, such as a marriage, divorce, birth of a child, or death of a spouse should cause you to review your beneficiary designations, but it’s a good practice to review them on a more regular basis too.

Many of us have spent years working and accumulating assets. Along the way, we have opened multiple bank, investment, and retirement accounts that have asked us to name beneficiaries directly for each account. Because these direct beneficiary designations supersede a Will, they need to be carefully reviewed and coordinated with an estate plan.

How your accounts are titled will determine whether or not they go through probate upon your death. Probate is neither good nor bad, but it’s not private and is an additional legal process that costs money and time when settling an estate and transferring property to your heirs. Once a Will is filed with the probate court, it becomes a public document, unless the court orders otherwise. Being cognizant of proper account titling allows you to avoid probate and transfer assets directly to your named beneficiaries since these assets will transfer outside of your Will.

Below is a quick recap of primary titling options and how assets will transfer upon death when titled in a particular way. Keep in mind that assets titled in the Individual Name with no designated beneficiary or Estate will transfer through probate. The other options will not.

  1. ‍Individual Name (with no designated beneficiary): Assets transfer through probate, then according to decedent’s last Will, or, if no Will, according to state intestate succession laws.
  2. Estate: Same as Individual Name above (through probate).
  3. Joint Tenancy: Assets transfer directly to named surviving owner(s).
  4. Payable on Death (“POD”): Typically used for bank accounts and CDs whereby the account will be paid directly to named beneficiaries equally.
  5. Transfer on Death (“TOD”): Typically used for investment accounts and real estate whereby the asset will be paid directly to named beneficiaries equally.
  6. Beneficiary Designations: Typically used for retirement plans and life insurance policies whereby assets or death benefit proceeds will pass directly to the named beneficiaries (primary/contingent).
  7. Living or Revocable Trust: Assets transfer to beneficiaries privately in accordance with the terms of the Trust.

Next, let’s review some of the top mistakes made with beneficiary designations:

1. Not Naming a Beneficiary:

By not naming a beneficiary, you already know your assets will go through probate, but in the case of a retirement plan or life insurance company holding your assets, there may be contract provisions that designate a “default” beneficiary which may be inconsistent with your intended wishes. In the case of a retirement account without a specific named beneficiary, there could be some avoidable tax consequences. See #2.

2. Naming Your Estate as Beneficiary for your Retirement Plan (and more):

Distributions made to an Estate go through probate and are more limiting than if you had named a spouse or non-spousal beneficiary. In the case of an Estate, there are only two options for distributions:

  • ‍a lump sum which makes the entire retirement amount taxable at that time, or
  • within five years of the decedent’s date of death and taxable at the time of distribution.

Spousal and non-spousal beneficiaries also have these same two distribution options, but each has another more tax-advantageous alternative.

A spousal beneficiary may roll over retirement proceeds directly into their own IRA and take required minimum distributions based on their age not the decedent’s. In the case of a non-spousal beneficiary, he or she can establish an inherited IRA and withdraw an annual amount based on their life expectancy. These are called stretch IRAs and in many cases these beneficiaries have the ability to stretch out their retirement distributions—and taxes—over a longer time period.

3. Having Outdated Beneficiaries:

The negative consequences are very clear – the person who gets your money may not be the intended beneficiary consistent with your last wishes. Your ex-spouse could inadvertently receive your assets if you fail to update your beneficiary to either your new spouse, children or others. If you specifically name each of your children as beneficiaries and forget to add the new addition to your family, they could be left out. If your primary beneficiary predeceases you, your contingent beneficiary will now be the recipient, so be sure to update both primary and contingent beneficiaries. And if your primary and contingent beneficiaries predecease you, then the same consequences will result as if you had not named a beneficiary at all. I think you get the picture—review and update your beneficiary designations often!

4. Naming Minors as Direct Beneficiaries:

Regardless of any Trust provisions that you may have carefully created in your Will for your minor children, if you name a minor child as a direct beneficiary of your life insurance policy or other accounts, the assets will be paid outright to your child as soon as they reach the age of 18 or 21, depending on the state. Providing an 18-year-old with immediate access to a large sum of money may not be in his or her best interest. In this case, it would have been better to create a living or revocable trust as the beneficiary with provisions for minors who are beneficiaries of this trust.

5. Naming Special Needs Individuals as Direct Beneficiaries:

A “special needs” individual is a person receiving government aid – now or in the future – for their disability. If you designate a “special needs” individual as a direct beneficiary, you could unintentionally disqualify that person from receiving these valuable government benefits. This individual must not only “spend down” their inheritance, but also go through the application process to re-qualify for benefits. It is advisable to work with an attorney who specializes in creating special needs or supplemental needs trusts to hold the inheritance of that individual, thereby not jeopardizing any potential government benefits.

6. Naming a Child or Co-Owner of a Deposit or Investment Account:

It is not unusual for an aging parent to add a trusted adult child as the co-owner of their bank or investment account, especially if the child is paying the parent’s bills or managing their finances. Typically, the parent’s intent is not for that adult child to inherit the entire account upon the parent’s death at the exclusion of other children or even grandchildren. However, this ownership arrangement can create some potential issues such as:

  • ‍Gifting – When adding a co-owner, the parent has legally created a “gift” of one-half of the account value to the adult child and may be required to file a gift tax return if the value is above the current $15,000 annual gifting limits.
  • Creditor – One-half of the parent’s account may now be subject to creditor claims of the adult child, including any potential lawsuits, divorce or bankruptcy issues.
  • Final Expenses/Distributions – While the parent may have intended for any remaining balance to be used for their funeral or final expenses upon death, the named co-owner is under no legal obligation to use this money for its intended purpose and can simply take the remaining account balance in full.
  • Possible Solutions – Create a durable power of attorney naming your trusted adult child as your agent to manage your finances during your lifetime or create a living trust naming the adult child as a trustee. Again, we recommend using an estate planning attorney to draft the appropriate estate and legal documents needed.

7. Naming Separate Children as Beneficiaries for Separate Accounts or Just One Beneficiary:

Sometimes parents will designate a separate child as beneficiary for each of their accounts. Over time, the ending balances of these accounts can differ significantly with one child receiving much more than the other, which may not have been the parent’s intention upon their death.

Occasionally, a parent may even designate one particular adult child as the sole beneficiary of all accounts or a life insurance policy with the intent that this particular child will equally share the remaining balance with their siblings. Perhaps the parent felt this child was more financially responsible and would take better care of their inheritance for the benefit of all their siblings. Similar to the co-owner situation above, that named beneficiary child has no legal obligation to share any of these assets with his or her siblings. Furthermore, depending on the value of the inherited assets, they may encounter gift tax consequences which might have been avoided as part of a well-designed estate plan.

In the above, a preferred designation would be to title beneficiary designations “per stirpes,” which means equally among all of my children (and even includes an equal share for a deceased child’s children) to ensure that all children receive an equal share. To the extent a parent has concerns over a child’s financial responsibility, it may be best to create a specific trust to hold the inheritance for the benefit of that child while protecting assets from creditors.

Designating beneficiaries incorrectly, among other mistakes, can have far reaching negative consequences. Beneficiary designations are an important part of your overall estate plan and should be reviewed and updated as part of a well-coordinated estate plan with the help of an estate planning specialist.

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