What Are Managed Accounts?
A managed account is an investment account owned by an investor but overseen by a hired professional. This can be for institutional investors or individual retail investors. The hired money manager actively makes investment decisions, considering the client’s specific needs, goals, risk tolerance, and asset size. Managed accounts are prevalent among high-net-worth investors.
Key Takeaways
- A managed account is owned by one investor but supervised by a professional money manager.
- Money managers often require six-figure minimum investments and charge a fee based on a percentage of assets under management (AUM).
- Robo-advisors offer a low-cost, algorithmic approach for everyday investors with minimal starting capital.
- Mutual funds are a type of managed account accessible to any investor without personalized management.
How a Managed Account Works
A managed account may include different financial assets, cash, or property titles. A money manager, responsible for buying and selling assets, operates with the discretion of the client’s objectives. Managed accounts involve fiduciary duty, meaning the manager must act in the client’s best interest, with potential penalties for failing to do so.
Money managers often enforce minimum dollar amounts for accounts they accept, frequently starting at $250,000, but possibly as low as $50,000. They charge an annual fee, typically around 1% to 2% of AUM, though discounts may apply for larger portfolios.
Robo-advisors are a cost-effective, digital alternative, using algorithms for portfolio management. They charge substantially lower fees, sometimes as low as 0.25% of AUM, with lower minimum investment requirements.
Managed Accounts vs. Mutual Funds: What’s the Difference?
Both managed accounts and mutual funds represent actively managed investment portfolios. However, a mutual fund is generally open to any investor and operates according to the fund’s objectives, not individual customization.
Pros of Managed Accounts:
- Fully customized to the investor’s preferences.
- Trade timings can minimize tax liabilities.
- Complete transparency and ownership of assets.
Cons of Managed Accounts:
- Require higher minimum investments.
- May take longer to invest or liquidate assets.
- Higher annual management fees.
Management Considerations
Managed accounts provide individually tailored portfolios designed to meet specific risks, goals, and needs. In contrast, mutual funds pool investors’ money, contributing to a fund guided by predefined objectives.
Transactional Considerations
Managed account transactions may take several days to fully invest, and the liquidation of securities is typically time-specific. Conversely, mutual funds offer daily purchase and redemption opportunities and might impose penalties for early redemption.
Managed account managers actively seek to offset gains and losses, potentially reducing the investor’s tax liabilities. In mutual funds, investors can’t control when portfolio managers execute trades, possibly leading to unexpected tax liabilities.
Special Considerations
In July 2016, several institutional investors made headlines for choosing managed accounts over hedge funds. Seeking broader platforms, tailored strategies, complete control, low fees, and full transparency, these investors prioritized managed accounts for better alignment with their goals.
For instance, Alaska Permanent Fund Corp. reallocated $2 billion from hedge funds to managed accounts for in-house investment decision-making. Similarly, Iowa Public Employees’ Retirement System planned to shift $700 million to managed accounts across various firms.
Related Terms: Mutual Funds, Money Manager, Robo-Advisors, Discretionary Authority, Fiduciary Duty, Assets Under Management.
References
- Vanguard. “Vanguard Personal Advisor Services”.
- Fidelity. “Fidelity Managed Accounts”.
- Internal Revenue Service. “Publication 529, Miscellaneous Deductions”, Page 5.
- SoFi. “How to Compare Robo Investing Fees”.
- Pensions & Investments. “Investors Warming up to Managed Accounts”.
