Managed Account

An investment vehicle where a professional manager oversees a pool of assets at the plan level

What is a Managed Account?

A managed account is a portfolio of stocks or bonds – or a combination of the two – that is owned by a single manager. The investor hires a professional investment manager to oversee the account’s operations to achieve specific objectives, such as long-term growth or current income. It is a way for an institutional investor or individual investor to benefit from a private investment manager’s professional expertise.

 

Managed Account

 

The investment manager exercises discretionary authority over the account, allowing him to make investment decisions relating directly to the owner’s goals and needs, asset size, and risk tolerance. Professional money managers tend to actively oversee such accounts because the markets in which they are invested are continually changing.

 

Summary

  • A managed account refers to an investment vehicle where a professional manager oversees a pool of assets at the plan level.
  • Professional money managers have full discretion to manage a client’s portfolio and make decisions according to the client’s needs.
  • They are deemed inferior to mutual funds based on high minimum investment requirements and slow investment and de-vestment.

 

How It Works

Management of a personal account involves three key players – the client, the financial advisor, and the investment manager. Each of the players enters a partnership with different goals but works together to please the principal owner of the account. What sets the financial advisor and the investment managers apart is their individual perspectives.

While the manager concentrates on monitoring and adjusting the managed account’s investment options, the financial advisor focuses on all aspects of the investor’s financial situation. Clients invest in managed accounts to meet specific financial goals. The account may contain cash, titles to property, or financial assets.

Provided that the professional investment manager conducts the transactions according to the client’s objectives, he does not need the principal client’s prior consent to sell and purchase assets. It is mainly driven by the idea that the money manager owes the principal client a fiduciary duty and must act with utmost loyalty and good faith, or potentially face criminal or civil penalties for breach of contract and lose the right to compensation. The investment manager will typically disclose all material facts concerning the account’s holdings and performance.

Managed accounts typically come with substantial minimum investment requirements and transactional fee structures. Many investors usually kick-start their investments with a minimum of $250,000, though some money managers may also accept managed accounts with minimums such as $100,000 and $50,000.

The proportion of the assets under management (AUM) determines the manager’s annual fee. The amount of pay varies considerably by a manager, but 1% and 2% of AUM are the most common. In addition, the account’s asset size determines the amount of the discount that managers offer, meaning that the smaller the portfolio, the larger the percentage fee. Since the fees are investment expenses, they are tax-deductible.

 

Managed Accounts vs. Mutual Funds

The similarity of managed accounts and mutual funds is in their active management of portfolios or pools of money that are invested over various classes of assets. A mutual fund is technically a type of managed account in which a professional money manager is hired by the fund company to oversee investments in the fund’s portfolio.

Similar to managed accounts, the manager possesses full discretionary powers over day-to-day investment decisions, which are tailored to the fund’s overall objectives. Investment of mutual funds hit a record high in the 1950s, and during the period, mutual funds were touted as investment vehicles for small retail investors to garner experience and professional expertise in money management. Previously, the service was a preserve for high-net-worth investors.

 

Pros and Cons of Managed Accounts (Compared to Mutual Funds)

Managed accounts and mutual funds are becoming increasingly popular among high-net-worth investors. Investors often turn to private money management because of the vast array of options available today. In such arrangements, clients are freed from cumbersome involvement in individual transactions. Some of the advantages and disadvantages of managed accounts over mutual funds are as follows:

 

Pros

  • Professional supervision of managed accounts addresses the needs of a client; mutual funds offer advanced portfolio management in line with the fund’s objectives.
  • Managed accounts can be timed to reduce tax burden; investors in mutual funds lack a choice when it comes to capital gain payout.
  • Transactions involving the assets in managed accounts are transparently disclosed to the investor; mutual fund investors do not own fund’s assets, and instead, share the asset value.

 

Cons

  • The minimum investment requirement for managed accounts is high, usually a six-figure dollar amount; the initial investment in mutual funds is comparatively lower.
  • Investing or de-vesting the managed accounts’ assets may take several days; shares in mutual funds can easily be converted to cash and can be sold or bought on a daily basis.
  • Annual fees, which can impact the overall return, are used to compensate managed account managers; the compensation from mutual funds is lower since they use expense fees to calculate annual fees.

 

Management and Transactional Considerations

In terms of management, professional fund managers are hired to oversee managed accounts and mutual funds. Managed accounts are customized to match certain risks, objectives, and client’s needs. Mutual funds are managed on behalf of other mutual fund holders and are adjusted to suit investment and return objectives.

In terms of transactions, managed accounts may be slower. For example, a full investment may get delayed because the client has not provided the full amount of money needed.

In contrast, mutual funds transactions are way faster since assets may be bought and redeemed daily, as desired. However, some penalties abound when mutual funds are redeemed before holding for a certain period of time.

 

More Resources

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • Asset Allocation
  • No-Load Fund
  • Rate of Return
  • Transaction Costs

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