Managed AccountExplained, Advantages & Disadvantages, and Examples

Lisa Borga

A managed account refers to an investment account that an investor chooses to have professionally overseen by a manager.

The investment account may be owned by an individual investor or an institution that chooses to take advantage of the professional knowledge and experience of a dedicated money manager.

Once entrusted with the account, the investment manager has discretionary authority to make decisions related to the account.

The manager can buy, sell, or trade assets without consulting the investor, so long as the decisions are in accordance with their needs and goals.

Because the investment manager is generally compensated based upon a percentage of the managed assets, generally managed accounts involve a significant value of assets.

managed account

Understanding Managed Accounts

A managed account is an investment account that can contain stocks, bonds, and other investment assets which are owned by an investor and managed by a professional money manager.

This manager has the authority to manage the account and buy, sell, or trade assets without the prior approval of the investor.

The money manager is still bound by fiduciary duty, which means that they must act in good faith according to the client’s best interests.

Otherwise, this would be a breach of contract, which could result in criminal or civil penalties in addition to a loss of the right to compensation.

Most money managers will generally require a large minimum investment from clients in order to begin managing an account.

Often this will be a starting minimum of $250,000.

However, some may accept as low as $50,000.

Generally, money managers will be compensated by an annual fee which is determined based on a percentage of the assets under management.

Though these fees are highly dependent upon the manager in question, they often are within 1-2% of the total assets.

Some managers will discount the amount they charge based on the value of the assets within the investment portfolio.

This means that the higher the value of the investment account, the lower the fee the manager will charge.

Due to the high minimum investment value and the lower fees for higher value investments, most managed accounts belong to high net worth investors.

However, new innovations in “robo-advisors” are attempting to expand this type of service to lower net worth investors.

A robo-advisor is an investment platform that is controlled by an algorithmically driven program that collects information on clients’ needs through an online survey, then automatically makes investments based on this data.

Generally, these services have low or no minimum balances and charge much lower fees, often only 0.25% of assets under management.

What Is the Difference Between Managed Accounts and Mutual Funds?

Mutual funds are very similar to managed accounts, and technically a mutual fund actually represents a type of managed account.

However, in common usage, a mutual fund can be distinguished from a typical managed account based on the ownership of the portfolio.

In a typical managed account, the portfolio belongs to a single institutional or individual investor and is managed by a professional money manager.

However, though a mutual fund is likewise professionally managed, it is generally owned by a number of investors who purchase shares in the fund.

Because a managed account is owned by a single investor, they are generally owned by a high net worth investor, whether that is an institution or an individual.

However, mutual funds, because they are owned by several investors, are a way for lower-value investors to benefit from the expertise of a professional money manager.

Level of Personalization

Though managed accounts and mutual funds are both managed by a professional money manager, they offer very different levels of customization.

A managed account is personalized to the investment goals and needs of its owner.

However, in contrast, a mutual fund often invests in particular types of assets and acts on certain investment and return goals set for all of its many investors.

With a managed account, a particular investor owns the assets within the account and can direct its manager to purchase, sell, or trade particular securities.

In contrast, an investor does not own the assets within a mutual fund and does not possess control over its investments.

Transactions

Transactions may take place more slowly in managed accounts. It might take the manager some time to even fully invest the funds.

Additionally, in some cases, it’s possible the manager might be restricted to liquidating securities at certain times.

In contrast, mutual funds can generally be bought or redeemed whenever the investor wants.

But, this is not always the case.

There are some mutual funds that may penalize investors for redeeming their mutual funds before the specified holding period ends.

The professional guidance a managed account provides investors can be beneficial to investors through buying and selling assets at a time when it would provide the most tax benefits to the owner.

This could mean the account owner may end up paying very little or no taxes on the account.

Whereas, with a mutual fund account, the shareholders do not have any control over when the underlying securities are sold, which could mean taxes on the capital gains.

Advantages and Disadvantages of Managed Accounts

managed account

Advantages of Managed Accounts

  • Managed accounts enable an investor to work with a money manager to customize an investment account to meet their personal needs and goals.
  • A professional money manager can help to minimize an investor’s tax burden by timing capital gains and losses as well as collecting losses in specific securities to offset gains.
  • Money managers generally are highly transparent concerning the assets in an investment account as well as concerning transactions. Alternatives such as mutual funds are often less clear concerning the contents and plans for the fund.

Disadvantages of Managed Accounts

  • Managed accounts generally require high minimum balances, often six digits. This is often outside the reach of a typical investor.
  • Investing in or de-vesting the assets in a managed account can take several days, limiting an investor’s ability to convey their investments into cash. In contrast, other investment options can often be converted within a day.
  • Managed accounts generally entail high fees in order to compensate the professional money manager. Other options, such as mutual funds, can offer a lower-cost option without the same level of customization and professional attention.

Different Types of Managed Accounts

Managed accounts vary and will ultimately depend on the firm you have the account with.

However, here are some of the more common types of managed accounts.

Separately Managed Account (SMA)

A separately managed account is a product. It is a portfolio of securities that an individual owns that are managed by a professional assets management firm.

It is very similar to a mutual fund. But, a separately managed account is managed for an individual instead of a group of investors.

The investor can see what securities are in their portfolio, but they do not need to do any trading or handle any administrative duties for the portfolio.

Individually Managed Accounts (IMA)

In an individually managed account, the portfolio is set up individually for each client.

The client discusses what their investment objectives are, and a portfolio is made to meet these objectives.

Investors can even include or exclude shares from their portfolio as they like.

The portfolio is then managed by the manager.

Managed Discretionary Accounts (MDAs)

Managed discretionary accounts are accounts in which money managers are allowed to trade investments without obtaining an investor’s permission for every transaction.

However, investors are required to sign a discretionary agreement that sets limits that the manager must abide by when trading for the account.

The fees for the money managers of these accounts are higher than those of non-discretionary accounts due to the necessity of handing all of the decisions and transactions, which is not required for non-discretionary accounts.

Unified Managed Accounts (UMAs)

A unified managed account is a type of account that allows money managers to manage a variety of different assets in one account, including bonds, EFTs, or mutual funds.

This is different than separately managed accounts, which would require an investor to open a separate account for the different assets.

A UMA also makes it possible for investors to easily compare the performance of their different investments.

Key Takeaways

  • A managed account is an investment portfolio that is owned by an investor and overseen by a professional money manager.
  • A professional money manager has the discretion to manage and make decisions regarding the investment portfolio according to the needs and investment goals of the client.
  • Many professional money managers require a high minimum value of investment assets and charge a fee based on a percentage of the assets under management. This is often 1-2% of the total assets.
  • Mutual funds are a type of managed account that is overseen by a professional money manager and is open for any investor to purchase shares of.

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