Did you know you could owe taxes on gains you never made? That’s the hidden cost of commingling, when your money is lumped together with thousands of other investors inside a mutual fund.
Example
I had a client from another advisor who came to me after a frustrating tax season. He had just bought into a mutual fund late in the year, only to receive a huge tax bill. Why? Because a fund he purchased sold stocks it had held for years, long before he was an investor, he paid taxes on gains that didn’t benefit him at all. He shook his head and said, “How does that make any sense?”
That’s commingling. That’s phantom gains.
The Problem: Commingling Costs You
- Shared tax liability: Even if you buy a fund today, if it sells a stock tomorrow that’s been held for 10 years, you pay taxes on those long-term gains.
- Hidden expenses: You’re responsible for the trading decisions of everyone else in the pool.
- Lack of control: You can’t harvest tax losses to offset gains, because you don’t own the stocks directly.
The “Fund” Example
Take any Mutual or Exchange Traded Fund (ETF). You buy into that fund and then you inherit all the hidden costs and commingling problems listed above. Or you could access the same strategy through a Separately Managed Account (SMA), where you own the individual stocks directly.
Over time, Morningstar data shows that the difference adds up. A mutual fund might show a 1.25% annual expense ratio, but when you factor in hidden costs and taxes, the real drag can be 1.6–1.8% per year. Over five years, that’s a 16% performance gap. Do you wonder why you aren’t keeping up with the market?
The SMA Advantage
With SMAs, you:
- Own the stocks directly.
- Control cost basis and tax events.
- Work with your advisor and CPA to harvest losses and reduce taxes.
- Avoid paying for other investors’ mistakes.
It’s like the difference between riding a rollercoaster (shared, standardized, no control) and driving your own car (customized, intentional, all yours).
In Summary
Mutual funds commingle your money with everyone else’s, and you pay the price. With SMAs, you skip the tax traps and hidden costs, while keeping the focus on your goals.
Want clarity over your gains and your taxes? Don’t let hidden tax obligations hit your returns. Reach out to structure ownership more cleanly.
References
- IRS Publication 550: Investment Income and Expenses.
- Cerulli Associates (2022). S. Managed Accounts Report.
- Morningstar (2025), The Hidden Costs of Passive Investing