Managed Account

A managed account refers to an account that is owned by an investor but overseen by a professional money manager. The manager handles all the trading activity and provides professional expertise for institutional or individual investors. 

Wealthy individuals or high-net-worth individuals often utilize this fee-based investment management product. Using this investment vehicle helps to determine how to allocate certain assets or funds most effectively.

How are decisions made? A manager, through discretionary authority, can actively make the best investment decisions for the owner. These decisions are according to the client's needs and goals, risk tolerance, and asset size.

Investors have the right to make investment decisions as well. However, having a professional money manager oversee such accounts is vital as the markets they invest in constantly fluctuate.

The account's operations could include long-term growth or current income. Typically, the money manager's goal is to promote portfolio growth. 

Understanding How a Managed Account works

You must first understand three key components to understand how this account works. These components are broken down below.

1. The client

   1. Invests in a MA 

   2. Has specific financial goals

2. The financial advisor

   1. Focuses on investor’s financial situation/stability

3. The investment manager

   1. Monitors and adjusts investment options

An account typically contains cash, titles to properties, or financial assets. 

A manager can make adjustments without prior approval or consent from the client as long as they meet the client's needs and financial goals. They also provide the needed expertise and time that many everyday people lack.

Because this job involves fiduciary duty, professional managers can face civil or criminal penalties if they do not act in good faith or with utmost loyalty.

Most money managers have a minimum dollar amount for account management. These minimums most commonly begin at $250,000, though some are willing to accept $100,000 or even $50,000 accounts.

In these accounts, these funds are used to make a portfolio that is modified toward the client's investment goals, risk appetite, and tax efficiency. A client's portfolio may include stocks, bonds, mutual funds, listed properties, and other financial assets.

The proportion of the assets under management (AUM) is considered to determine the manager's annual fee. The most common rates of AUM are around 1% to 2%. 

Many managers will provide discounts based on account size. As a result, larger portfolios often receive a smaller fee. Some firms, however, can be negotiated. More information can be found here.

A new advancement, known as robo-advisor, has been introduced to managed accounts that could benefit lay investors or people with low financial literacy. This digital platform provides automated, algorithmically-driven portfolio management.

This platform is also arguably cheaper, with AUM rates around 0.25% and a $5 initial fee to begin.

Types

There are various kinds of accounts that investors can use. Each account differs in structure, legality, costs, etc. Understanding these differences is necessary before investing in a managed account.

Every firm has its terms and services that are offered under different supervised accounts. 

Here are some of the major types of accounts that could be useful to know:

1. Individually MA (IMAs)

• Customized share portfolios that are built and managed by a money manager
• Investors can adjust shares according to their preferences.
• Discussion of investment objectives, core investment strategy, taxation status, investment restrictions, ESG considerations, and any holdings are included in the portfolio.
• IMAs normally operate outside of model portfolio methods, allowing asset investment flexibility.
• Suitable for investors with $500,000 or more

2. Separately MA (SMAs)

• Also referred to as a "wrap account," an investment portfolio that has a flat fee charged quarterly or annually.
  • Generally requires around $25,000 to $50,000 minimum.
• A product-based service based on model securities portfolios available within an investment firm, which usually comprises individual stocks, bonds, cash, or other securities
• Clients are presented with various model portfolios that offer different benefits and an assortment of securities that could be invested across separate accounts for each portfolio.
• Model portfolios are selected based on the client's needs and managed by a professional portfolio or money manager.
• The investor, being the beneficial owner of the assets, may receive tax benefits.

3. Managed Discretionary Accounts (MDAs)

• Discretionary accounts allow money managers to make investment decisions without the investor's approval.
• An agreement must be reached and signed to limit the manager's ability to do with the account.

• The managerial fees are often higher for MDAs as there is more hands-on activity with the transactions and decisions.
• Like SMA, the investor remains the beneficial owner and receives the same tax benefits and transparency.

4. Unified Managed Discretionary Accounts (UMAs)

• Permits money managers to handle assets such as mutual funds, bonds, ETFs, and other investments in a single account
• It gives investors the ability to compare the performance of different investments at the same time.
• A manager can combine various SMAs to include fixed-income assets, ETFs, and other financial investments with a UMA.

Advantages and Disadvantages

Investing in MAs has its upsides. For one, the client's needs are always attended to with priority. Trades within these accounts can often minimize the tax burden for clients. Finally, clients can expect all transactions to be disclosed in complete transparency.

More often, people are intimidated by the six-figure minimum investment required to have a MA. Many managers also charge higher fees, which can affect the overall returns for the client, with transaction processes often taking a while.

The advantages of managed investing include the following:

1. Industry expertise
2. A structured process
3. Tailored personal advice
4. Professional management
5. Peace of mind.

Industry knowledge is essential as thousands of assets and funds could be invested. Knowing which ones will work best is something financial advisors will be able to assist with.

Most managers follow a specific algorithm or strategy when handling a client's funds. This way, investors do not randomly allocate their funds.

In any regulated account, fiduciary duty is required, but owners should still be aware of unethical actions.

A more diversified portfolio is important when balancing risk and reward. But unfortunately, most individual investors cannot properly balance a portfolio without knowledge of a strategy or from an advisor.

People often feel stressed and frustrated from seeing numbers rise and fall in volatile markets. However, experts are trained to handle this type of volatility, which ultimately gives more and more investors confidence in having a professional take their accounts.

Something to be aware of when dealing with MAs is the time it takes for the money to be fully invested. More often, the investment activity is slow. This could be due to the specific time demand for selling assets.

These accounts and mutual funds have regulated portfolios or large sums of money invested over various assets. Technically speaking, a mutual fund is a type of MA.

There are also many disadvantages to consider when dealing with managed investing. The following includes:

1. The affordability of the initial contribution
2. Time which it takes to process investment activity 
3. Significant impacts on the returns for high portfolios

In some cases, people may not have enough money for that initial minimum investment. Professional financial advice could benefit everyone if there wasn't the issue of affordability. 

Sometimes transactions can take a while to go through completely. People may sometimes feel as though it takes too long and therefore isn't worth the wait in the case that the market changes.

In cases where the market changes affect the portfolio negatively, there is always a possibility of extremely significant losses.

Advantages and Disadvantages of Mutual Funds

A mutual fund is also a type of investment vehicle consisting of a portfolio of stocks, bonds, or other assets. 

There are different advantages and disadvantages to managed accounts and mutual funds. 

Advantages of mutual funds:

1. The same amount of expertise
2. Lower investment 
3. Percentage of fund
4. Diversification

Mutual funds can provide the same expertise management but solely in regard to the fund's objectives. Mutual funds investors are also not able to prevent a capital payout. Most holders only own a share of the fund's value.

There is also a significantly lower investment requirement, with lower expense ratio fees. The shares are also easily converted to cash and can be managed daily.

Mutual funds are often a close comparison to managed accounts and are tailored toward investors, not individuals. Investors, who invest in mutual funds, take a percentage of the fund's value.

In contrast to MAs, shares of mutual funds can be purchased at any time. There are, however, penalties for some mutual funds. For example, if an investor redeems their mutual funds before the regulated time, these penalties may ensue.

Disadvantages of mutual funds:

1. High expense and sales charges
2. Authority abuse
3. Unsatisfactory trades

When dealing with mutual funds, paying attention to the expense ratios and sales charges is important. In some cases, these fees are large enough to reduce overall returns.

Authority abuse can occur when managers make unnecessary trading investments or have excessive account activity that ultimately ends in loss.

Timing is incredibly vital when buying and selling on the mutual fund. Not knowing when to sell and when to buy can result in unsatisfactory trades and poor execution.

Wrap account and examples of managed money

The term 'wrap account' refers to a range of services that includes a single fee. Institutional investors and high-net-worth individual investors primarily use wrap accounts.

When an investment is made in this fee-based product, individuals should expect consistent updates on the financial situation and financial plan from the financial advisor.

Capital appreciation is always something to look forward to with managed money. This occurs when an asset's selling price exceeds the buying price.

For example, if a money manager were to purchase a stock at $10, they would need to monitor the market and the supply until it has increased in value. Suppose the stock is now worth $35. The client would now have a $25 capital gain.

The primary job responsibility of managers is to operate an account to the client's specific financial needs and goals. Managers and clients will profit if all the contract terms are made.

Another example of professional management would be 401k accounts or IRAs. Most people who receive 401k benefits are unsure what to do with it. However, managing an account on one's own can often lead to a loss in investment and stress. 

With expert advice, managed accounts can provide optimized retirement savings, proper investment strategies, and capital gain.

To make the process a lot easier, hiring an expert account manager or financial advisor to assist with retirement accounts can help in the long run. Selecting someone with the proper experience and training will get you the right investment advice.

All money managers working in the US must follow the regulations established by the US Investment Advisers Act of 1940 and the US Securities and Exchange Commission or SEC. Here is the link to the SEC.

Researched and authored by Christopher Yang | LinkedIn

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