When you shop for an advisor, don't just ask whether they use exchange-traded funds or index mutual funds.

These days, with as little as $100,000 to invest, you can find advisors who will help create a personalized index tailored to your specific needs.

Unlike traditional index-minded advisors, they won't just allocate funds. Instead, they'll buy a representative sampling of the stocks found in something like the Vanguard Total Stock Market ETF (AMEX: VTI).

Then, you can screen for sectors or styles to best match your portfolio. For example, if you work at GE or Exxon Mobil, two big components of VTI, perhaps you'll want to scale down those weightings.

And if you're a socially responsible investing booster, Patrick Geddes, chief investment officer at Aperio Group, says separately managed accounts using indexes can make such strategies much more affordable.

Screening The Offenders 

For example, Aperio uses different screens to weed out offending names from benchmarks like the S&P 500. Then, it buys the remaining stocks, which can be allocated along the same lines as someone holding an ETF or index fund.

"SRI investing has gotten a really bad rap," Geddes said. "A lot of advisors will argue that SRI investing actually reduces returns because it adds a layer of extra costs. But that doesn't have to be the case."

Aperio says that its indexed-separately managed accounts can beat even ETFs in terms of lower expenses. That includes iShares KLD Select Social Index (AMEX: KLD) and iShares KLD 400 Social Index (AMEX: DSI).

"From our perspective, it's bringing custom indexing to a lot more investors," Geddes said. "It's a low-cost alternative in the separately managed accounts field."

But unless you've got a fairly hefty portfolio, you won't be able to tap into Aperio's indexing expertise. It works mainly with advisors. As is becoming more of the custom in the industry, Aperio is a specialist that creates and manages portfolios. Then advisors can devote more time to their clients' overall financial planning without getting bogged down in the finer points of portfolio management.

Depending on the total costs involved, indexed SMAs can actually turn out to be a win-win situation for investors and advisors. But it certainly pays to shop around. For example, Aperio works with a network of advisors. So fees can vary depending on a particular firm's menu of portfolio services.

And while asset level requirements are coming down, indexed SMAs with minimum investment levels below $250,000 are still few and far between.

Fine-tuning Required? 

But allocation experts like Geddes question whether many people really need such fine-tuned indexing strategies in smaller portfolios.

Last summer, Geddes built an independent Web site based around his own research as well as others on index investing.

In a nutshell, the site guides investors to determine whether they really need to pay for professional help or not. "It's kind of a site to teach investors how to be informed consumers," Geddes said.

For those investors who want a little more sophistication, he says separate accounts using tailored indexes are a legitimate alternative to high-priced wrap accounts and other types of brokerage services.

That's especially true, Geddes adds, if you're trying to reduce tax bills.

"You hear a lot of managers claiming that separate accounts are a great way to maximize tax savings," he said. "But if you ask them how much higher their after-tax returns are compared to their pre-tax returns, they don't like it."

If their clients' after-tax returns are generally lower, then they're on par with typical actively managed funds.

By his own calculations, the average U.S. stock mutual fund's after-tax returns lag those before taxes are taken into account by about 1.4% per year. "I've actually adjusted it to reflect the lower capital gains and dividend rates. And it's still a big tax drag on the typical mutual fund," Geddes said.

On average, he says an index fund's tax drag is only around 0.3% per year.

A good separate accounts manager can actually produce greater after-tax returns than pre-taxed using index funds, Geddes maintains. He says Aperio's forecast is 0.5% to 1.5% per year in after-tax alpha for its clients.

"Our observed returns are a lot higher, but we've had a tailwind in the last several years," Geddes said. "The loss harvesting opportunities in 2001­­-2002 and the past six months have been rather juicy. But that's not really applicable going forward."

Murray Coleman is managing editor at IndexUniverse. You can reach him at: This e-mail address is being protected from spambots, you need JavaScript enabled to view it .