What Is a Managed Account?
Let me tell you directly: a managed account is an investment account that you own, but someone else manages it for you. You could be an institutional investor or just an individual retail investor. You hire a professional money manager to oversee the account and handle the trading inside it.
With full discretionary authority, this manager makes investment decisions tailored to your specific needs, goals, risk tolerance, and the size of your assets. You'll most often see managed accounts used by high-net-worth investors.
Key Takeaways
- A managed account is a portfolio owned by one investor but supervised by a professional money manager hired by that investor.
- Money managers can require six-figure minimum investments and get compensated by a fee that's a percentage of assets under management (AUM).
- Robo-advisors provide algorithmically-managed accounts at lower costs for everyday investors with small starting balances.
- A mutual fund is a type of managed account, but it's open to anyone who can buy shares, not personalized for one investor.
How a Managed Account Works
Your managed account can hold financial assets, cash, or even titles to property. The manager has the authority to buy and sell without needing your approval each time, as long as they stick to your objectives. Since this involves fiduciary duty, the manager must act in your best interest, or they could face civil or criminal penalties. Expect regular reports from the manager on performance and holdings.
Managers usually set minimum dollar amounts for the accounts they'll handle, so you need a certain level of funds to invest. Many start at $250,000, but some accept $100,000 or even $50,000.
You'll pay an annual fee, calculated as a percentage of AUM, typically around 1% to 2%. Larger portfolios often get discounts, meaning a smaller percentage fee. Note that the IRS no longer allows these fees as tax-deductible investment expenses.
For everyday investors, there's a newer option: robo-advisors. These are digital platforms using algorithms for automated portfolio management with minimal human involvement. They charge less, say 0.25% of AUM, and you might start with just $5.
Important Note
Managed accounts are typically for high-net-worth individuals because they require a high minimum investment amount.
Managed Accounts vs. Mutual Funds
Both managed accounts and mutual funds are actively managed portfolios investing in various assets or classes. Technically, a mutual fund counts as a managed account, where the fund company hires a manager to handle the portfolio and adjust holdings based on the fund's objectives.
Mutual funds emerged in the 1950s as a way for small retail investors—the 'little guy'—to access professional management, which was previously only for the wealthy.
Pros
- Customized managed accounts address your specific needs; mutual funds follow the fund's objectives.
- You can time managed account trades to minimize taxes; mutual fund investors can't control when capital gains are realized.
- Managed account holders get maximum transparency and control over assets; mutual fund holders own only a share of the fund's value, not the assets themselves.
Cons
- Some managed accounts need six-figure minimums; mutual funds have much lower entry points.
- Investing or divesting in managed accounts can take days; mutual fund shares are more liquid and trade daily.
- Managed account fees are high and impact returns; mutual funds' expense ratios are usually lower.
Management Considerations
Professional managers oversee both managed accounts and mutual funds. But managed accounts are personalized to your risks, goals, and needs. Mutual fund management serves all holders, focusing on the fund's overall objectives.
In a managed account, you allocate funds, and the manager buys actual securities into your portfolio. You own them and can direct trades if you want. Mutual funds classify by risk tolerance and objectives, not individual preferences. As an investor, you own a percentage of the fund's value, not the fund or its assets.
Transactional Considerations
Transactions in managed accounts might move slower—it could take days to fully invest money or liquidate holdings, depending on the securities. Mutual fund shares, however, can usually be bought or sold daily, though some have penalties for early redemption.
Your managed account manager can buy and sell to offset gains and losses at tax-optimal times, potentially avoiding taxes on big profits. Mutual fund shareholders have no say in when managers sell, so you might face unexpected capital gains taxes.
Special Considerations
In July 2016, managed accounts made news as institutional investors shifted from hedge funds to them for broader platforms, customized strategies, full control, daily valuations, lower fees, and transparency on fees and holdings.
For example, the Alaska Permanent Fund Corp. redeemed $2 billion from hedge funds to invest in-house via managed accounts. The Iowa Public Employees’ Retirement System planned to move $700 million to managed accounts with seven firms that year.
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